Chilean Swaps Reach Eight-Month High After Jobs Surprise

Chilean interest-rate swaps capped the steepest quarterly gain since 2008 as traders increased bets the central bank will have to switch to a tightening policy to contain inflation as economic data exceed estimates.

The two-year swap rate rose 12 basis points to an eight-month high of 5.51 percent at 2:15 p.m. in Santiago. The contract has gained 1.26 percentage point this year, the steepest quarterly rise since the second quarter of 2008. The peso rose 0.3 percent to 488.35 per dollar while the Bloomberg JPMorgan Latin American Currency Index was little changed.

Unemployment slid to 6.4 percent in the three months through February from 6.6 percent the month before, the National Statistics Institute reported today. The median forecast of 11 analysts surveyed by Bloomberg was for the jobless rate to rise to 6.7 percent. In minutes of its March policy meeting released today, the central bank said it only considered keeping the benchmark rate at 5 percent, with one board member saying it may take longer than previously thought for inflation to return to the bank’s target of 2 percent to 4 percent.

“We had the minutes and unemployment, which have added pressure to rates,” said Sebastian Ide, head of rates trading at Banco de Chile in Santiago. “The minutes were neutral but clearly concerned about inflation and adding to that the detail of the unemployment data showed salaried employment is rising while self-employment is stable. Inflation expectations are rising today but still have a bit further to go.”

Implied Inflation

The five-year swap rose 14 basis points today to 5.79 percent, the highest since July.

Five-year breakeven inflation, which reflects future average inflation priced into the swaps market, rose 11 basis points to a nine-month high of 3.46 percent.

Two-year breakeven rose nine basis points to 3.54 percent. That compares with 2.87 percent on Jan. 12 when the central bank unexpectedly cut the benchmark rate by 25 basis points.

The forwards market for unidades de fomento, Chile’s inflation-linked currency unit, today priced in 3.46 percent inflation this year, up from 3.41 percent yesterday and 3.36 percent the day before.

A report yesterday showed Chilean retail sales rose 12.4 percent in February from a year earlier, beating all nine estimates by analysts surveyed by Bloomberg. Manufacturing climbed 4.8 percent over the same period, compared with the 4.7 percent median estimate of 10 analysts.

Copper, which accounts for more than half of Chile’s exports, climbed as much as 1.5 percent in New York today and was set for the biggest quarterly gain since 2010, as equities and the euro climbed amid speculation European officials will increase funds for rescuing indebted nations.

Expressed Concern

Chile’s peso has gained 6.4 percent this quarter as copper gained 11 percent.

“Copper has been a bit of a drag heading into the end of the quarter, but the Chilean peso seems to be outperforming everyone today,” said Flavia Cattan-Naslausky, a local markets strategist at RBS Securities Inc. in Stamford, Connecticut. “The stronger employment number and the more hawkish tone on inflation in the minutes reinforces the resilience of Chile, especially for a small, open economy.”

The third-highest borrowing costs among major Latin American rate-setting countries hasn’t curbed inflation or economic growth in the top copper-producing nation.

“All the board members expressed their concern about the inflation outlook and highlighted the rebound in various measures of underlying inflation,” policy makers said, according to the minutes released today. “They also highlighted increases in short-term inflation expectations. However, they also agreed that the risks from the external scenario remained significant.”

‘More Hawkish’

One policy maker said there was no evidence of a sustained demand slowdown, according to the minutes.

“They were definitely more hawkish than they have been in the last couple of months, but things will have to improve a lot for them to hike,” said Italo Lombardi, Latin America economist at Standard Chartered Bank in New York. “They seem comfortable at this level.”

Monthly inflation, which exceeded estimates at 0.4 percent in February, will accelerate to 0.5 percent in March, the highest level since December, according to the median estimate of 58 traders and investors polled March 27 by the central bank.

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