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Chilean Peso Depreciates as G-20 Rebuff Damps Risk Demand

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Feb. 27 (Bloomberg) -- Chilean interest-rate swaps reached six-month highs as rising commodity prices and economic optimism led traders to price in a reduced probability of rate cuts.

The five-year swap, or the cost of locking in a fixed interest rate, rose two basis points, or 0.02 percentage point, to 5.27 percent at 2:09 p.m. Santiago time, on course for the highest close since Aug. 5. A 55-basis-point monthly increase is the steepest in a year. The one-year breakeven inflation rate rose 2 basis points to 3.29 percent while the two-year breakeven climbed 5 basis points to 3.07 percent.

Chile’s central bank maintained its benchmark rate at 5 percent at the last policy meeting after cutting in January for the first time in more than two years. Expectations that the bank will cut rates again are fading as commodity prices rise, global economies show signs of improvement and inflation expectations increase. The three-month swap rate at 4.94 percent shows traders rule out a rate cut in March.

“Commodities have been rising in the first part of the year, which adds to expectations of inflation,” said Sebastian Ide, head of the interest-rate trading desk at Banco de Chile in Santiago said today. “‘One-year inflation expectations could reach 3.3 percent and with the stable international scenario, that doesn’t leave the central bank much room to move.”

Inflation Forecast

The swaps market is pricing in a benchmark rate of 4.75 percent in a year and above 5 percent in two years, Ide said. Inflation may exceed 5 percent in the first half of the year, economists at Santiago-based brokerage Larrain Vial SA wrote today in a note to clients. Prices rose 4.2 percent in the 12 months through January.

The central bank of Colombia on Feb. 24 raised its benchmark interest rate for a second straight month, increasing by 25 basis points to 5.25 percent. Israel’s central bank today maintained its rate at 2.5 percent, citing optimism in financial markets and higher inflation expectations.

Sugar for May delivery rose 11 percent this year on ICE. Cocoa for May delivery rose 13 percent. Copper, Chile’s biggest export, has rebounded 13 percent in New York after tumbling 20 percent last year.

Chile’s peso gained for a third straight day, rising 0.1 percent to 479.68 per dollar, the highest close in two weeks.

Offshore investors had a $4.8 billion short position in the peso on Feb. 23, according to central bank data.

To contact the reporter on this story: Sebastian Boyd in Santiago at sboyd9@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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