Chile Peso Reaches Two-Month High on Copper, Carry-Trade Demand
Chile’s peso strengthened to a two- month high as the price of copper, the Latin American country’s biggest export, rose on speculation China and the U.S. may act to stoke economic growth.
The peso gained 0.5 percent to 485.35 per U.S. dollar, the strongest closing level since May 7. Copper for September delivery climbed 1.6 percent.
The Chilean peso’s 3.2 percent advance this month is the biggest in Latin America amid slowing inflation and stable interest rates. Commodities reached the highest level in more than two months today as copper climbed on expectations the U.S. Federal Reserve may ease monetary policy to spur growth in the world’s largest economy and that China, the biggest buyer of copper, may lower bank reserve requirements.
“The market is focused on fundamentals,” said Alejandro Araya, a trader at Banco Santander Chile in Santiago. “Chile offers an attractive yield compared with rates worldwide. With copper now rebounding, this could go to 480 per dollar.”
The peso has returned 3.5 percent this month for investors who buy the currency with funds borrowed abroad in dollars, according to data tracked by Bloomberg. In a so-called carry trade, investors borrow funds where interest rates are low and buy assets in nations that offer higher yields.
International investors in the Chilean peso forwards market had a $9.2 billion short peso position on July 17, the lowest since May, according to central bank data.
Breakeven inflation rose after state-owned oil refiner Empresa Nacional del Petroleo yesterday reported the wholesale price of gasoline would rise this week. Santiago’s premium gasoline prices will rise 2.9 percent to 755.1 pesos ($1.55) a liter beginning today. Lower-grade gasoline prices will increase 1.7 percent to 693.5 pesos a liter, Enap said.
Chile relies on imports for almost all its oil and gas needs and hydrocarbons are its biggest import. The price of a barrel of West Texas Intermediate crude oil has risen about 8.6 percent this month.
One-year breakeven inflation climbed 10 basis points, or 0.1 percentage point, to 1.93 percent.
Wheat futures rose to the highest in almost four years as dry U.S. weather erodes prospects for the harvest in the biggest exporter of the crop. Baked goods make up 3.2 percent of the Chilean inflation basket.
“We’re very concerned about the drought in the U.S., which has led to an almost vertical in wheat futures,” said Felipe Alarcon, an economist at Banco de Credito e Inversiones in Santiago. “That could generate an increase in bread prices in August or September.”
The forwards market for unidades de fomento, Chile’s inflation-linked accounting unit, shows traders are wagering on 1.43 percent price rises for 2012. That is “very unlikely, especially if things don’t change,” Alarcon said.
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