Bloomberg News

Chile Peso Erases Loss on Federal Reserve Stimulus Speculation

June 18, 2012

Chile’s peso erased its loss as speculation the U.S. Federal Reserve will announce more monetary stimulus overshadowed concern that Europe’s debt crisis will deepen.

The peso appreciated almost 0.1 percent to 499.63 per U.S. dollar. The Bloomberg JPMorgan Latin American Currency Index was little changed. Copper, Chile’s main export, gained 0.2 percent to $3.3965 a pound after a report showed confidence among U.S. homebuilders climbed to a five-year high.

The U.S. central bank’s meeting June 19-20 may extend a program known as Operation Twist under which it sells short-term debt and buys longer maturities to keep borrowing costs low, according to economists at JPMorgan Chase & Co. and Jefferies Group Inc. The euro fell against the dollar, giving up the gain that came after Greece’s election was won by parties that support sticking to the terms of a bail-out agreement and remaining in the single currency.

“The peso is at the whim of the external sector,” said Flavia Cattan-Naslausky, a strategist at Royal Bank of Scotland Group Plc in Stamford, Connecticut. “We got through Greece, and the market didn’t really embrace that. We expect the Fed to do something, whether it’s on Wednesday or not, and the market is clearly expecting some kind of signal.”

The yield on Spanish 10-year bonds rose above 7 percent for the first time since the euro was introduced in 1999 as an increase in bad loans fueled concern the country’s banking crisis is worsening. Earlier this month Spain became the fourth euro member to seek a bailout, asking for as much as 100 billion euros ($126 billion) to support its banks. Bad loans increased to 8.72 percent of total lending in April from 8.37 percent in the previous month, the Bank of Spain reported today.

‘Pretty Ugly’

“It’s pretty ugly,” said Alejandro Araya, a trader at Banco Santander Chile in Santiago. “The market hardly reacted at all to the Greek elections, and Spain and Italy are an evolving story. There’s a lot of uncertainty, and when things are uncertain you buy the dollar.”

International investors in the Chilean forwards market had the biggest bet against the peso on record on June 14, with a $10.6 billion short peso position against the dollar, data published by the central bank showed today.

Local institutional investors had a $17 billion bet on the peso. Banks and brokers had a $6.3 billion short peso position in the forwards market and a $7.3 billion long peso position in the spot market.

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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