Bloomberg News

Chilean Peso Slides as Copper Declines on Fed Inaction, Europe

December 14, 2011

Dec. 14 (Bloomberg) -- Chile’s peso fell the most in three weeks as copper plunged after the U.S. Federal Reserve failed to announce measures to spur growth and on concern the European crisis will sap demand for the metal used in new homes and cars.

The peso weakened 1.1 percent to 521.35 per U.S. dollar from 515.5 yesterday, the steepest decline since Nov. 23. The Bloomberg JPMorgan Latin American currency index fell 0.7 percent. The dollar index, which measures the strength of the greenback against major trading partners, reached the highest since January.

The price of copper, which makes up more than half of Chile’s exports, declined as much as 5.4 percent to the lowest since Nov. 25, eroding the value of the peso. The euro fell below $1.30 for the first time since January as Italian borrowing costs increased at a debt auction and European stocks declined.

“It’s copper and Europe,” said Andres de la Cerda, a money markets trader at Bice Inversiones. “The euro broke through an important floor it had because of uncertainty and the lack of a light at the end of the tunnel. The longer it takes before we see some kind of concrete measures the worse things are going to get.”

Federal Reserve policy makers yesterday said the U.S. economy is maintaining its expansion even as the global economy slows, while refraining from taking new actions to lower borrowing costs.

Offshore investors in the Chilean peso forwards market had a $5 billion short position in the currency against the U.S. dollar on Dec. 12.

Bond Sale

Chile’s central bank today auctioned $110 million of fixed- rate bonds due in two, five and 10 years, it said.

The ratio of bids to bonds sold was 5.7 on the 10-year bonds, the highest since August. The yield on the debt, 5.27 percent was the lowest at an auction since October and a discount of two basis points to the yield on the bonds at 11:45 a.m. Pension funds and insurance companies bought 97 percent of the debt.

The bid-to-cover ratio was 4.9 on the two-year bonds, 5.3 on the five-year bonds and 5.7 on the 10-year bonds. The bank set a yield of 4.93 percent on the two-year bonds, 5 percent on the five-year bonds. Banks bought 98 percent of the two-year bonds sold, 80 percent of the five-year bonds and 2.4 percent of the 10-year bonds.

Pension Demand

“There was a lot of demand from pension funds concentrated in the 10-year,” said Felipe Alarcon, an economist at Banco de Credito & Inversiones in Santiago who used to work on bond auctions for the central bank. “They’re probably extending duration on the expectation that there’s a rate cut coming. There’s a high risk of a 25 basis-point rate cut in January, so if they extend duration they get bigger gains.”

The central bank yesterday left its benchmark rate unchanged at 5.25 percent, in line with economists’ forecasts. Traders had been pricing in possible quarter-point cut.

The two-year swap rate in pesos fell six basis points to 4.25 percent, the lowest since Nov. 30. The six-month swap rate fell three basis points to 4.56 percent.

The yield on inflation-linked government bonds due in 2017 declined eight basis points to 2.53 percent.

--Editors: Brendan Walsh, James Attwood

To contact the reporter on this story: Sebastian Boyd in Santiago at sboyd9@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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