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Chile Peso Rebounds as Central Bank Comments Blunt Copper Tumble

Chile’s peso rebounded from the biggest drop among global currencies yesterday as speculation the central bank will cease its dollar-buying program overshadowed copper’s plunge to a one-year low.

The currency snapped a five-day losing streak, including a 4 percent decline yesterday, to advance 0.7 percent to 517.36 per U.S. dollar. The decline this week was the biggest since February 2009.

Central bank President Jose De Gregorio said yesterday the institution will evaluate its $12 billion dollar-buying program. Investors have fled emerging-market currencies and commodities amid concern of a new recession in developed countries. Copper, which accounts for more than half of Chile’s exports, slumped to a one-year low in New York today.

“Just look how copper is falling,” said Eugenio Cortes, head of currency forwards at EuroAmerica Corredores de Bolsa SA in Santiago. “The market is a little cautious though, expecting a signal from authorities, otherwise the dollar would be higher. The central bank could suspend its dollar buying.”

The central bank is reviewing its dollar purchases, De Gregorio said in an interview in Washington. Were the central bank to suspend its $50-million-a-day program the dollar might fall by 10 to 15 pesos, Cortes said. The bank has so far bought $9.2 billion.

“In the statement where it announced its intervention in January, it said it was a policy that it would be permanently evaluating,” Finance Minister Felipe Larrain told reporters by phone from Washington about the dollar-purchase program. “I think it´s reasonable for that policy to be evaluated.”

Copper Tumbles

Suspending or decelerating the intervention would be a decision for De Gregorio, Larrain said.

Copper for December delivery declined 6 percent to $3.2815 a pound by 12:59 p.m. on the Comex in New York. Prices reached $3.215, the lowest level since Aug. 25, 2010. The metal is down 17 percent this week, on course for the biggest retreat since December 2008.

Pressure from foreign investors selling pesos to buy dollars diminished today as stocks in the U.S. gained and the euro stabilized.

“There were a lot of external dollar buyers and local stop-loss orders that had been forcing the peso down,” said Andres de la Cerda, a trader at Bice Inversiones in Santiago. “That factor has gone.”

All the 25 emerging-market currencies tracked by Bloomberg fell this week, led by those of South Africa, Brazil and Chile.

Brazil Rally

Today’s rally in the Brazilian real has helped buoy the Chilean currency, said Diego Donadio, a strategist at BNP Paribas SA in Sao Paulo. The real gained 2.9 percent against the U.S. dollar on speculation the government may quash a tax on foreign-exchange derivatives in a bid to stem the currency’s rout.

“The real’s move contributed to easing pressure on the peso,” he said in a phone interview. “There’s sentiment that central banks will do something to stem currency volatility.”

Donadio, who yesterday wrote to clients that the peso could fall to 550 per dollar, remains bearish. De Gregorio has always said that the bank’s intervention is under constant review, he said.

Ultimately, “the sharp fall in copper prices will be more important than the hope that the central bank will do something about its intervention,” Donadio said.

Chile’s interest-rate swap curve steepened this week as traders priced in lower interest rates in the next two to three years and investors shifted out of longer maturity positions in emerging-market debt.

Curves Steepening

“The same thing has happened across Latin America and in Eastern Europe: curves steepening because of asset liquidation by foreigners who tend to crowd into longer maturities,” Donadio said.

That steepening eased today in Chile as swap rates fell in longer maturities.

Three-year interest-rate swap rates in pesos fell eight basis points, or 0.08 percentage point, today to 4.52 percent, following a seven basis point decline yesterday. The two-year swap dropped five basis points to 4.44 percent after slumping 12 basis points yesterday.

The five-year swap rate fell two basis points to 4.845 percent, a three basis point increase on the week. The 10-year rate in pesos fell four basis points to 5.19 percent, from its 5.1 percent level of Sept. 16.

Breakeven Rates

Inflation-linked swap rates fell further still as traders braced for faster-rising prices as the weaker peso may push up the price of imports. Six-month breakeven inflation rose three basis points today to 2.14 percent, up from 1.94 percent on Sept. 16.

The yield on Chile’s 6 percent government bonds in pesos due in 2020 was unchanged at 5.12 percent. The yield on a basket of 10-year inflation-linked central bank bonds fell one basis point to 2.28 percent, after declining 11 basis points yesterday.

The spread investors demand to buy Chile’s 3.25 percent dollar bonds due in 2021 instead of U.S. Treasuries climbed to 180 basis points, the widest since they were first sold on Sept. 7. The spread on its 3.875 percent bonds due in 2020 declined to 175 basis points from a record 179 reached yesterday.

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