The Chilean central bank’s decision to slow the pace of interest-rate rises makes measures to weaken the peso more likely, according to Mario Arend, an economist at Celfin Capital SA in Santiago.
The peso fell for a third day today, sliding 0.1 percent to 479.26 per U.S. dollar from 478.95 yesterday. The last time the bank intervened to weaken the currency it did so by buying $50 million U.S. dollars a day.
At their monthly meeting yesterday, policy makers voted to slow the pace of rate rises, lifting by 25 basis points after four straight 50 basis-point increases. The dollar is depreciating worldwide and borrowing costs are falling in the largest economies, the central bank said in its policy statement, while promising to keep lifting its own rate.
“Given the fundamental strengths that affect the exchange rate and that will continue for a prolonged period, we could see the rate reaching levels where the central bank intervenes,” Arend said. “That probability is higher than yesterday. The central bank doesn’t have as much room to moderate future rate rises.”
The peso may reach 460 per dollar, Diego Donadio, a strategist at BNP Paribas SA in Sao Paulo wrote in a note to clients after the bank’s decision last night. He recommended clients short the dollar against the peso at 479.
The net short position of foreign banks versus Chilean banks in the U.S. dollar against the peso rose to $1.3 billion on Oct. 13, the latest figures available. That implies foreign investors have boosted bets on the peso to the highest since the central bank began publishing daily data two years ago.
The central bank has discussed intervening, its President Jose De Gregorio said on Oct. 6 and government ministers have expressed concern with the currency’s rise, which pushes up the dollar cost of Chile’s exports. The peso has gained 14 percent this half, more than any other Latin American currency tracked by Bloomberg. The price of copper, the country’s biggest export has risen 29 percent in the same period.
The central bank “should intervene and will intervene” by buying dollars, said Sebastian Edwards, a Chilean economist at the University of California, Los Angeles and former World Bank chief economist for Latin America. Such an intervention need not push the dollar higher against the peso, as long as it slows the dollar’s descent, he told reporters today after a conference in Santiago.
“The dollar will depreciate against a basket of currencies,” he said. “We don’t need to follow the herd.”