A key measure of Chilean inflation expectations fell to the lowest in more than two years this week as traders reacted to tumbling oil prices.
Two-year breakeven inflation reached 2.36 percent today, the lowest since February 2010. The 28 basis point decline this week is the steepest since August last year.
Oil futures dropped to an eight-month low yesterday, tumbling the most this year as manufacturing slumped in China and Europe. Chile’s central bank this week cited falling oil and food prices as it lowered its inflation forecast for this year by 80 basis points to 2.7 percent on June 18. Inflation expectations fell further after state-owned oil refiner Empresa Nacional del Petroleo reported domestic wholesale fuel prices would decline this week.
“There has been a sharp readjustment after the monetary policy report, the information on local prices and the decline in commodities,” said Sebastian Ide, head of rates trading at Banco de Chile in Santiago. “It’s not just oil. Coffee is down this year, cocoa is down, corn is down, sugar is down. Local breakevens hadn’t reflected that worsening international mood.”
Breakeven inflation measures the future average price rises being discounted by swap and bond traders.
The forwards market for unidades de fomento, Chile’s inflation-linked currency unit, shows traders are pricing in a 0.08 percent fall in prices in June from May. The expectation of falling unidad de fomento values makes it more expensive for investors to finance bets on breakeven inflation rising.
Forwards traders are pricing in inflation of 1.97 percent in 2012, down from 2.35 percent a week ago.
Chile’s peso recorded a weekly drop after data showed manufacturing in China, the biggest buyer of Chile’s exports, waned and the U.S. Federal Reserve’s efforts to boost growth fell short of some analysts’ expectations.
The currency depreciated 0.2 percent to 503.17 per U.S. dollar, extending the weekly decline to 0.6 percent. The peso posted gains in the previous two weeks.
The peso reached a high of 494.04 per dollar earlier this week on the expectation that the U.S. Federal Reserve would announce a third round of stimulus that went beyond extending its current program. Data published yesterday suggested that manufacturing in China is on course to contract for an eighth month in June.
“It was pricing in too much stimulus from the U.S.,” said Eugenio Cortes, head of currency forwards at EuroAmerican Corredores de Bolsa SA in Santiago. “That didn’t happen and when some more negative data came out, that pushed the dollar back up. The China data hit commodities and that impacts the peso directly.”
The price of copper, which makes up half of Chile’s exports, fell as much as 1.3 percent in New York today before rebounding. China is the world’s biggest consumer of the metal, used in new homes and cars, and buys more than twice as much from Chile as second-largest customer, Japan.
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