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Chilean Rate Swaps Decline as Peso Rally Acts as Inflation `Escape Valve'
Chilean interest-rate swap rates fell to a three-week low as traders reduced bets on central bank rate increases after the currency’s outperformance in August dimmed prospects for inflation.
The one-year interest-rate swap contract in pesos fell six basis points, or 0.06 percentage point, the most since Aug. 18, to 3.68 percent as of 4:03 p.m. New York time today, according to prices compiled by Bloomberg. The six-month rate dropped four basis points to 3.11 percent.
Interest-rate swap yields reflect traders’ view of the average interest-rate over the life of the contract. The inflation forwards market is pricing in a 0.04 percent price rise in August from July, down from a high of 0.65 percent on July 21, according to Banco Santander SA prices.
“The exchange rate is acting as an escape valve for inflation,” said Jorge Selaive, chief economist at Banco de Credito e Inversiones in Santiago. “The market is expecting that the central bank will be more cautious because the falling exchange rate is slowing price rises.”
The one-year peso swap rate has declined 22 basis points in two weeks from a high of 3.89 percent on Aug. 17. The two-year rate fell 15 basis points in the same period from 4.23 percent.
The peso strengthened to 502.75 per U.S. dollar from 521.25 per dollar at the end of July. The 3.7 percent gain in August beat the 24 other emerging-market currencies tracked by Bloomberg. Only the Yemeni rial and the Madagascar Ariary appreciated more among world currencies, according to data compiled by Bloomberg.
Lower Inflation
“The falling exchange rate implies lower inflation, so inflation compensation is falling even though the economic data is positive,” Selaive said.
Two-year breakeven inflation, a measure of inflation expectations priced into the swaps market, dropped 39 basis points to 3.35 percent today from 3.74 percent on Aug. 11, according to Bloomberg calculations. Three-month breakeven inflation dropped to 3.55 percent from 6.99 percent on July 29.
Inflation forwards are pricing in 3.38 percent inflation this year, down from 4.02 percent on July 20. Inflation expectations have declined as a tax increase on loans was reversed, the Santiago public transit system canceled a proposed fare increase and the peso’s rise cheapened the cost of imports.
Chilean unemployment fell to 8.3 percent in the three months through July, from 8.5 percent a month earlier, the National Statistics Institute said today. Unemployment declined from 11.6 percent a year earlier.
Industrial Production
Yesterday, the statistics institute reported that industrial production rose more than forecast in July and consumer spending expanded 19 percent. The data implies South America’s fifth-largest economy grew 6.5 percent in July, Aldo Lema and Cesar Guzman, economists at Inversiones Security in Santiago, wrote yesterday in a note to clients. That would complete the fastest three months of growth in five years.
The peso slid for a second day as copper, the country’s main export, fell after a report showed U.S. business activity in August was the slowest this year.
“The whole market is waiting for the U.S. jobs data on Friday, and the peso should trade between 500 and 505 per dollar until then,” said Alejandro Araya, a currency trader at Banco Santander SA in Santiago.
To contact the reporter responsible on this story: Sebastian Boyd in Santiago at sboyd9@bloomberg.net
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