Chile Peso Falls Past 500 in Biggest Four-Day Drop Since October

Chile’s peso declined past 500 in the biggest four-day drop since October as copper prices sank on concern turmoil in Europe will sap demand for the metal, the South American nation’s biggest export.

The currency dropped 0.3 percent to 500.89 per dollar, slipping past 500 per dollar for the first time in four months and extending its decline over the past four days to 2.9 percent. Economic concern sent Chilean bond and swap yields tumbling as investors sought safety and bet on lower rates.

Offshore investors in the Chilean forwards market raised their bet against the peso to $8.2 billion on May 14, the most since October 2009, according to data from the central bank. Copper declined after talks on forming a Greek government collapsed and the country geared up for elections in June that may lead to its exit from the euro. The world’s biggest miner, BHP Billiton Ltd. (BHP), said commodity prices will extend their drop.

“The break through 500 was due given the slump in copper prices,” said Alejandro Cuadrado, a Latin American currency strategist at Banco Bilbao Vizcaya Argentaria SA (BBVA) in New York. “The Chilean peso had been lagging. The short position in Chilean pesos is getting heavier. If you look at the last quarter of last year, with copper at comparable levels, the peso was around 501 or 502 per dollar.”

Futures on copper, which makes up more than half of Chile’s exports, fell as much as 2 percent to $3.449 a pound.

Pared Decline

The currency weakened as much as 0.7 percent to 502.97 per dollar before paring its decline as a report showed output from U.S. factories, mines and utilities increased in April the most since December 2010.

“The U.S. industrial production data was good, and things are starting to improve internationally,” said Ronald Volpi, head of spot currency trading at EuroAmerica Corredores de Bolsa SA in Santiago.

Falling commodity prices have trimmed Chilean inflation expectations. The forwards market for unidades de fomento, Chile’s inflation-linked currency unit, priced in 2.59 percent price increases in 2012, down from 3.13 percent a month ago. One-year break-even inflation in the swaps market fell seven basis points to 2.78 percent, the lowest level since Jan. 5.

Five-year break-even inflation in the bonds market decreased six basis points to 2.93 percent. In the swaps market it slid seven basis points to 2.97 percent.

Central Bank Bond

Chilean central bank 10-year bond yields may fall to 5.4 percent from the 5.50 percent today, according to Felipe Alarcon, an economist at Banco de Credito e Inversiones (BCI) in Santiago.

“The market is looking for safer paper,” he said. “Chilean central bank and government bonds act like a Bund or Treasury and if it was easier for foreigners to buy them the yields would be even lower.”

The five-year swap spread in pesos fell to negative 26 basis points, from negative eight basis points a month ago. Swap spreads measure the gap between bond and swap yields and are negative in Chile because the greater participation of foreign investors in the swaps market means that swap rates tend to track international economic conditions more closely than the bonds. Swap spreads are positive in most countries and reflect the extra risk premium of lending to a counterparty in the swaps market instead of the sovereign.

At the central bank’s auction of 10-year bonds yesterday, it received orders for 4.7 times the amount of bonds it sold, the highest since December. The ratio at a similar auction on May 3 was 4.5 times and on April 24 it was 4.1 times.

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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