The Chilean peso fell the most in a week as the price of copper, the country’s main export, declined faster than oil prices, weakening the country’s terms of trade.
The peso slid 0.3 percent, more than the other six major Latin American currencies tracked by Bloomberg, to 475.26 per U.S. dollar from 473.85 yesterday.
As copper falls compared with oil, Chile’s export income declines relative to the cost of its imports. South America’s fifth-largest economy relies on imports for 99 percent of its oil while oil and gasoline are its two largest imports.
“Terms of trade keep hitting the local economy,” said Alejandro Araya, a trader at Banco Santander SA in Santiago. “Copper is falling and oil remains above $100. As long as they don’t fall into line we’ll have the peso between 474 and 478 per dollar.”
Foreign investors in the Chilean peso forwards market had a net bet of $1.3 billion that the peso would weaken against the dollar as of March 4, central bank data show.
Chile’s central bank bought $50 million today at an average of 475.5 pesos per U.S. dollar, according to its website, as part of a $12 billion plan to weaken the peso.
The bank is scheduled to announce today whether it will reduce or continue its daily dollar buying. Economists Rodrigo Aravena at Banchile Inversiones and Felipe Alarcon at Banco de Credito & Inversiones said they don’t expect any changes.
The peso weakened 6.6 percent in the first week after the bank announced its dollar-buying plan. That weakness contributed to an increase in inflation expectations, which is now fueling speculation that the central bank will consider accelerating the pace of its interest-rate increases on March 17.
Factors other than the bank’s dollar purchases are now driving the currency. It was the weakest currency in the region in January and the strongest in February as copper rose to a record. So far in March the peso is little changed as expectations of rate rises mitigate the weaker terms of trade.
Buying a greater volume of dollars every day would mean the bank needs to sell more bonds to soak up the extra pesos it would be leaving in the market, said Banchile’s Aravena.
“That could mean an increase in yields which, given the probable rise in central bank rates, could have a very negative effect on the fixed-income market,” he said. “The only thing the dollar buying is achieving is the accumulation of international reserves, nothing else.”
The bank may say it plans to sell an increased volume of inflation-linked debt, according to BCI’s Alarcon.
Yields on central bank inflation-linked bonds have declined as traders price in expectations of faster-rising prices. Banco Security this week recommended investors have all bond portfolios in short- and medium-term inflation-linked debt.
“Anything that even looks inflation-linked gets bought up completely,” Alarcon said. “It wouldn’t be a surprise if the bank kept overweighting inflation-linked bond sales versus pesos. They may want to affect breakeven inflation and they could do that by overweighting inflation-linked issuance.”
Breakeven inflation is a measure of the gap between inflation-linked and nominal yields. It reflects traders’ estimation of the likely average of future inflation.
The gap between 10-year nominal and inflation-linked central bank bonds rose to 3.81 percent on March 2, the highest since October 2008, according to data compiled by Bloomberg.
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