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Chilean Peso Reaches One-Month Low on U.S. Budget Deal Failure

Chile’s peso sank to the lowest in a month amid a sell-off in emerging-market currencies as stocks fell and the price of the country’s main export, copper, sank as a U.S. Congressional panel failed to agree on deficit cuts.

The peso slid 1.5 percent to 518.51 per U.S. dollar from 510.89 on Nov. 18. It earlier hit a six-week low of 520.05 per dollar. All but two of the 25 major emerging-market currencies tracked by Bloomberg sank against the dollar today.

The U.S. Dollar Index, a six-currency gauge of the greenback’s strength, rose for the fifth day in six after talks in the U.S. on ways to cut the federal budget deficit stalled, according to a Democratic aide, and the cost of insuring against a default on European government debt reached a record high. Copper for March delivery sank 3 percent to $3.3180 a pound in New York.

“There’s no deal to cut spending,” said Ronald Volpi, head of spot currency trading at EuroAmerica Corredor de Bolsa SA. “There’s a significant loss of confidence, almost panic, overseas. It’s not just affecting Chile but all the emerging markets. Stocks are down, copper is well down, and it all impacts the peso.”

Copper makes up more than half of Chile’s exports, so fluctuations in its price affect the flow of dollars into the country and therefore demand for pesos. The peso was the worst performer in Latin America today, as the Bloomberg JPMorgan Latin American Currency Index dropped 1.4 percent to a six-week low.

Pension Funds

Pension funds selling pesos to buy dollars helped push the Chilean peso to depreciate faster than its peers, Nomura Securities Inc. trader Alex Pigatto wrote today in a note to clients. Data released by the pension funds’ supervisor showed that in October, the funds reversed a previous trend of cutting foreign equity exposure and buying Chilean bonds.

Pension funds shifting out of the peso suggests “a weaker bias” for the peso, Flavia Cattan-Naslausky, a strategist at RBS Securities Inc. wrote in a note to clients on Nov. 18.

The three-month non-deliverable forward contract for the Chilean peso depreciated 1.5 percent to 523.96.

Interest-rate swap and bond yields fell on speculation the central bank may lower its benchmark rate by 50 basis points next month. The one-year swap rate in peso slid nine basis points to 4.51 percent from 4.6 percent on Nov. 18. The three-month swap rate in pesos fell four basis points to 5.06 percent from 5.1 percent. The one-year inflation-linked swap rate declined five basis points to 1.8 percent from 1.85 percent.

Yields Fall

“The driver remains the international scenario: the lack of agreement by the U.S. supercommittee hit stocks which implies greater risk aversion in general,’ said Sebastian Ide, head of fixed-income market-making at Banco Santander Chile in Santiago. “In Chile people are starting to talk about a 50 basis point cut at the next meeting instead of the 25 basis point cut that was priced in. Local bond yields fell flowing the swaps.”

Swap yields in other markets also fell. The five-year swap rate in euros declined four basis points to 2.04 percent today from 2.08 percent on Nov. 18. The five-year swap rate in Australian dollars sank 13 basis points to 4.22 percent.

Chile’s central bank bond yields in pesos may fall a further 25 basis points as investors retreat to quality, according to economists at Larrain Vial SA. The yield on 10-year central bank bonds was 5.46 percent today, down 6 basis points from Nov. 18. It could fall to 5.2 percent, Larrain Vial economists wrote today in a strategy note without giving timing. The yield on 10-year inflation-linked central bank bonds may fall to 2.4 percent, they wrote, from 2.71 percent today.

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