Chile’s peso, the best performing currency in the world this year, is rallying toward a level that prompted the central bank to intervene in 2008 and 2011 in an effort to stem its gains and aid exporters.
The CHART OF THE DAY shows how the peso has strengthened on an inflation-adjusted basis against the currencies of its five largest developed trading partners: the U.S., Japan, the U.K., Canada and the euro region. Last month, the peso reached its strongest level by that measure since 2007, according to Bank of America Merrill Lynch.
Chile’s central bank has left its benchmark interest rate unchanged at 5 percent since January even as traders in the forwards market wager inflation will slow, making Chile an attractive place to invest money borrowed in other currencies. The peso’s 8.7 percent advance this year against the dollar is the biggest in the world.
“The exchange rate has appreciated significantly, and that may prompt the central bank to do something,” said Marcos Buscaglia, Bank of America Merrill Lynch’s chief Latin America economist in New York. “We’re not saying they are definitely going to intervene, but the risk has increased.”
Bank of America Merrill Lynch strategists Claudio Irigoyen and Ezequiel Aguirre recommend selling the Chilean peso and buying the Mexican peso in the forwards market.
Chile’s central bank last year bought $12 billion to stem currency gains and augment international reserves. The bank also intervened in the currency in April 2008 when it announced a plan to buy $8 billion. It abandoned the program after Lehman Brothers Holdings Inc. collapsed in September of that year.