Chile’s peso weakened on concern that Europe’s debt crisis may worsen and that slower growth will curb demand for the country’s exports, led by copper.
The peso dropped 0.8 percent, the most since April 10, to 488.75 per U.S. dollar. It has traded between 480 and 490 per dollar all month. The Bloomberg JPMorgan Latin American Currency Index fell 0.7 percent.
The euro dipped below $1.3 for the first time since January after Spain’s Prime Minister Mariano Rajoy said the country would be unable to fund itself without spending cuts as yields on Spain’s debt rose to the highest in four months. Copper earlier fell to a three-month low on concern that slowing growth could curb demand for the metal used in homes and cars.
“The European situation has gotten worse,” said Flavia Cattan-Naslausky, a local markets strategist at RBS Securities Inc. in Stamford, Connecticut. “We’re seeing a retreat. And on top of that there’s the copper story and there has been some flow from pension funds buying dollars.”
Offshore investors in the peso forwards market had a $7.2 billion short position in the currency on April 12, the biggest in two years, according to the central bank.
“That’s huge,” said Felipe Alarcon, an economist at Banco de Credito e Inversiones in Santiago. “With the yield differential rising you would expect it to go the other way. It may show people taking the view that this correction is going to be more of a long-term thing and seeing weaker copper. There are compensating flows in the spot market from investment in the mining sector.”
Mining companies are selling dollars in the spot market to finance exploration and investment in Chile, which accounts for the limited impact the increase in short positions from offshore investors in the forwards market has had on the spot price of the peso, Alarcon said. The spot position of Chilean banks and currency traders fell to a long peso position of $9.2 billion from $12.1 billion on March 26, implying banks have sold $3 billion-worth pesos in the spot market in three weeks.
The two-year interest-rate swap rate fell five basis points to 5.26 percent, the lowest in a month. Bond yields declined and inflation expectations also fell.
The five-year breakeven inflation rate fell five basis points to 3.26 percent. The six-month breakeven rate fell 25 basis points to 3.10 percent.
The yield on 10-year fixed-rate central bank bonds fell four basis points to a one-month low of 5.8 percent today. Yields for the bonds have fallen 20 basis points in April.
Spain’s 10-year bond yield climbed nine basis points to 6.07 percent on concern the country’s sharp budget cuts may imperil growth and deepen rather than ease its financial crisis.
The central bank will tomorrow leave its benchmark lending rate unchanged at 5 percent, according to all 15 economists in a Bloomberg survey.
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