Chile’s peso rose, extending the biggest weekly gain in two months, as a bigger-than-estimated increase in U.S. new home sales bolstered demand for riskier assets.
The peso appreciated 0.2 percent to 519.10 per U.S. dollar from 520.28 on July 23. It rallied 1.9 percent last week, outperforming other Latin American currencies. Interest-rate swap rates in Chilean pesos fell today, while inflation-linked swap yields rose.
Sales of new homes in the U.S. rose more than forecast in June, helping drive U.S. stocks higher. The Dow Jones Industrial Average rose 1 percent, the euro gained 0.7 percent and the price of copper, Chile’s biggest export, increased 1.7 percent in London.
“New home sales pushed the Dow higher and if that continues you’ll see an appreciation of the peso,” said Cesar Perez, an economist at Celfin Capital SA in Santiago.
The peso may strengthen further after Standard & Poor’s confirmed today that a planned sovereign global bond sale denominated in the currency will be payable in dollars, said Jorge Selaive, chief economist at Banco de Credito e Inversiones.
Chile’s government plans to sell $1.5 billion bonds in dollars and pesos to help pay for rebuilding from a devastating earthquake, which would require it to sell dollars and buy pesos for spending.
“The clarity could contribute to the appreciation we expect in the peso, and which we’ve already seen over the last few weeks,” Selaive said by telephone from Santiago. “We expect the currency to strengthen this year with rates starting to rise and the economy recovering strongly.”
Chile’s central bank has lifted its benchmark interest rate twice in the past two months by half a percentage point each time as the economy grows at the fastest pace in five years.
Economic activity may have grown at 5.1 percent in June, according to research published today by Bice Inversiones in Santiago. That would imply that Chile’s economy grew about 5.6 percent year-on-year in the second quarter, the fastest since the first quarter of 2007.
The one-year nominal interest-rate swap rate declined for the first time in two week, sliding four basis points to 3.5 percent. A similar contract denominated in unidades de fomento, Chile’s inflation-linked currency unit, rose five basis points to minus 0.7 percent.
That means the average pace of inflation priced into the market over the next 12 months fell two basis points to 4.28 percent, according to Bloomberg calculations. Breakeven inflation priced into the market may be declining ahead of an auction of seven-, 10-, 20- and 30-year inflation-linked bonds totaling $535 million programmed for July 28.
Traders “are looking ahead to the auction on Wednesday, which will be an acid test to see how flexible yields are and how solid priced-in inflation expectations are,” Selaive said. Investors “are pretty keen on inflation-linked instruments. This will be a test to see if inflation compensation normalizes,” he said.
One-year breakeven inflation in the swaps market has increased 59 basis points this month.