Chile’s peso posted the biggest weekly drop since March after political turmoil in Greece and evidence of slowing growth in China undermined the country’s export prospects and foreign investors bet against the currency.
The peso depreciated 0.2 percent to 487 per U.S. dollar today, extending a weekly decline to 0.8 percent.
Copper, the backbone of Chile’s export economy, fell for a second week as data showed China industrial production grew at the slowest pace since 2009 and industrial output in India unexpectedly contracted. The peso is trading at the lower limit of a range it has held since early March, falling to 491.85 on May 9 yet failing to close weaker than 490.
“We need a few negative days in a row to break out,” said Eugenio Cortes, head of currency forwards at EuroAmerica Corredores de Bolsa SA in Santiago. “There’s a lot of risk, but there’s also a lot of desire to save the situation so the market receives any lifeline that gets thrown with enormous optimism.”
Offshore investors cut their peso forwards position by $890 million on May 9 to a $7.7 billion short, their biggest bet against the Chilean currency since November 2009. As recently as August of last year they had a net long peso position. Offshore investors may include the overseas branches of local banks.
Local investors had a $14.9 billion net long peso position in the forwards market, down from $15.2 billion at the end of April.
As both foreign and local investors have trimmed forwards bets on the peso this month, their Chilean bank and broker counterparts cut wagers on the dollar in the forwards market to a seven-month low of $7.3 billion and their long peso position in the spot market to a seven-month low of $8.5 billion. In the week through May 9, Chilean banks and brokers bought $1.1 billion of U.S. dollars in the spot market.
“It’s not that surprising given what it happening abroad,” said Felipe Alarcon, an economist at Banco de Credito & Inversiones in Santiago. “There are big movements in each direction but the tendency is clearly towards greater risk aversion. If you’re betting on carry, the risk of a currency reversal is huge.”
The inflow of dollars into the Chilean spot market may have contributed to a decline in basis swap rates, a measure of the cost of borrowing dollars locally, and an increase in the spread between the spot price of the peso and forward prices.
The one-year basis swap rate in Chile fell to an eight-month low of 15 basis points today, down from 40 basis points on May 4. The one-year forward point, which measures the differential between the spot peso price and the one-year non-deliverable forward price, rose to 20.5 from 19.8 on May 4. The six-month forward point rose to 11.1.
The forward points and the basis swap spread are functions of each other. Banks can use the forwards market to fund themselves in dollars by buying dollars for pesos in the spot market and buying them back in the forwards market.
Mike Moran, a currency strategist at Standard Chartered Plc in New York earlier this week warned that the Chilean peso may start to “play catch-up” with the Brazilian and Mexican currencies. The peso may start to fall against the Brazilian real after it reached a five-year high earlier this week, Royal Bank of Canada said today in an e-mailed note to clients.
RBC’s head of global foreign exchange strategy, Nick Chamie, recommended betting that the peso drops to 257.75 per real.
The peso, which reached the strongest level against the real since 2006 on May 9, slid 0.3 percent to 249.74 per real at 2:26 p.m. in Santiago today.
The peso is at risk from falling prices of copper, Chile’s biggest export, and should catch up with declines in the real and Mexican peso versus the dollar over the past three months, Chamie wrote. Brazil’s government may intervene by selling the U.S. currency to stop the real from falling after it passes 1.98 per dollar, he wrote.
“There has been an increasing chorus of finance officials suggesting that current Brazilian real levels are already supportive for local industry while local newswires suggest there is increasing uneasiness in the cabinet over the foreign-exchange pass-through effects from further real weakness,” Chamie wrote.
The Brazilian real fell 12 percent against the dollar in the past three months as the central bank lowered borrowing costs and bought greenbacks to keep the local currency weak. The peso has depreciated 1.7 percent in the past three months against the dollar, while the Mexican currency is down 5.5 percent.
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