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Swaps Climb Most in a Month on Rate Pause Bets: Santiago Mover

Chilean interest-rate swaps rose the most in a month as traders reduced bets on lower borrowing costs amid today’s surprise growth in U.S. payrolls and an unexpected decline in unemployment in the Latin American country.

The two-year swap rate, or the cost of locking in a fixed interest rate, rose seven basis points, or 0.07 percentage point, to 4.62 percent as of 4:05 p.m. in Santiago. It earlier reached 4.66 percent for the biggest intraday gain since Jan. 6.

Swap rates have reached three-month highs as traders discount the possibility that the central bank will hold its benchmark rate in February after unexpectedly lowering by a quarter-point to 5 percent last month. Unemployment is at the lowest level in more than two years and a 10 percent jump in December retail sales led to an increase in inflation forecasts.

“We’ve had a run of good news, including today’s payroll numbers, annual inflation expectations are rising every day and the central bank is running out of arguments to lower rates,” said Christian Gomez, who trades swaps and inflation forwards at Banco Santander Chile in Santiago. “The market is pricing in 4.5 percent at year-end when a week ago it was at 4 percent.”

U.S. payrolls rose 243,000 in January, more than the forecast of any of the 89 economists in a Bloomberg survey. Chilean unemployment fell to 6.6 percent in the three months through December.

Forward levels for unidades de fomento, Chile’s inflation-linked currency unit, show that traders now expect prices to rise 3.13 percent this year, up from 2.97 percent a week ago. Forwards are discounting 0.17 percent inflation in January.

The three-month swap rate today implies one rate cut of 25 basis points in the next three months instead of the two 25 basis point rate cuts it was implying, Gomez said.

Implied Inflation

Two-year breakeven inflation, a measure of the average pace of price rises implied by swap rates, rose three basis points to 2.99 percent today compared with 2.87 percent a week ago.

Swaps traders are now pricing in a pause in February followed by rate cuts in March and May, according to Alex Pigatto, a local markets trader at Nomura Securities Inc. in New York.

Chile’s peso appreciated 0.3 percent to 478.86 per U.S. dollar, capping a sixth straight weekly gain.

Banco del Estado de Chile, repatriating proceeds from its $500 million bond sale, may have been partly responsible for yesterday’s 1.4 percent appreciation of the Chilean currency, Pigatto wrote in an e-mail.

Sell Dollars

Mining companies tend to sell the dollars they get for exports, and copper makes up half of Chile’s exports, in order to raise pesos to meet paychecks. In the four years through yesterday, the peso strengthened on average 0.12 percent on Thursdays and depreciated on the other four days, according to calculations by Bloomberg.

“The market has lost some momentum since the rally in the last few days,” said Katia Diaz, an economist at 4Cast Inc. in New York. “We saw some major dollar supply from copper companies, which often buy pesos on Thursdays. Now we’re coming against a support level at 476 to 478 per dollar.”

The appreciation of the peso may lose momentum as it gets back toward the 466 per dollar level that prompted the central bank to start buying dollars last year, according to Pigatto and Osvaldo Cruz, an economist at Banco de Credito & Inversiones in Santiago.

Yields on inflation-linked and nominal bonds also rose today. The yield on inflation-linked central bank bonds due Feb. 1, 2021, rose three basis points to 2.3 percent and the yield on nominal bonds due the same day rose eight basis points to 5.14 percent. The yield on inflation-linked government debt due in 2017 rose 12 basis points to 2.19 percent.

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