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Chilean Peso Falls as Greece Concern Sends Copper to Year’s Low

Chile’s peso fell to a four-month low as prices for copper tumbled on concern Europe’s debt crisis may threaten growth in China.

The peso sank 0.6 percent to 508.45 per U.S. dollar after copper futures fell as much as 2.9 percent to $3.3865 a pound. The currency reached 511.27 earlier, the weakest since Jan. 9. The Chilean peso closely tracks the price of copper, which makes up more than half the country’s exports.

The euro tumbled to its lowest since 2010 as European leaders gathered in Brussels amid concern that Greece will leave the currency union. The World Bank warned that growth in China may slow to 8.2 percent this year from 9.2 percent last year and lower-than-forecast Japanese exports raised concern about demand in the second-largest buyer of Chilean copper.

“Copper, the euro and stocks: there isn’t anything that isn’t falling aggressively,” said Alejandro Araya, a currency trader at Banco Santander Chile in Santiago. “It is worrying the way things are testing and breaking technical support levels. If we are heading back to where we started the year, the only thing that has far to fall is the Chilean peso.”

Central bank data today showed that Chilean exports to China fell 0.6 percent in the first quarter from a year ago while exports to the U.S., the next-biggest destination, rose 14.9 percent. Chinese imports of Chilean copper cathodes, concentrate and ore for refining rose 9.1 percent.

Pension Fund Rules

Proposed new rules on currency hedging for Chilean pension funds announced last week may lead to a $2.3 billion unwinding of hedges, according to Santiago-based economist Cesar Perez at Celfin Capital. While they may lead to short-term demand for dollars, the impact probably will be transitory, Perez wrote in a note to clients today. Nomura Holdings Inc. yesterday estimated the impact would create $1.25 billion in unwinding.

The proposed rule changes may in fact strengthen the peso and lead to a $3.8 billion increase in forward purchases of the peso versus the dollar, according to research from New York-based strategist Brendan Hurley at Banco Santander SA and Santiago-based economist Juan Pablo Castro. That would tend to strengthen the peso.

Local investors, mostly pension funds, had a $17.2 billion long peso position in the forwards market on May 18, central bank data published today showed.

“We can’t anticipate changes because they would depend on what part of the current derivatives the pension fund managers classify as hedging or investment, and in that classification there is some degree of freedom for each fund manager,” the pensions supervisor wrote in an e-mailed reply to questions. “However, under the new definition there will be a lower amount than currently that will be considered hedging.”

Interest-Rate Swaps

Offshore investors reduced their short peso position to $8.9 billion from $9.5 billion on May 17.

Interest-rate swaps fell, reversing a two-day rebound, as rates fell worldwide. The two-year swap rate declined seven basis points, or 0.07 percentage points, to 4.8 percent. The five-year swap rate fell eight basis points to 5.01 percent.

Swap rates imply traders expect the central bank to lower the benchmark interest rate from 5 percent within six months whereas a survey published today by the central bank showed that the median forecast of 55 traders and investors is for the rate to remain unchanged for the next 24 months.

‘Local Sentiment’

“Today’s survey is more indicative of local sentiment than external data while the curve reflects the global mood and the unwinding that could be produced by a Greek exit from the euro,” said Sebastian Ide, head of rates trading at Banco de Chile in Santiago. “No one knows how the market will react to a Greek exit, but we could easily see Treasuries falling 20 basis points. The dichotomy between the curve and the survey reflects the premium for that risk.”

The yields on inflation-linked bonds fell faster than the yields on inflation-linked swaps while fixed bond yields decline less than fixed swap yields. The different behavior of bonds and swaps reflects the more international investor base in the swaps market.

The yield on 10-year inflation-linked bonds fell six basis points, compared to a two basis-point decline in the yield on 10-year inflation-linked swaps. The yield on 10-year fixed-rate debt fell five basis points while the 10-year swap rate fell eight basis points. Bond holders thus increased the compensation they require for holding bonds that don’t adjust for inflation, while swap investors reduced it.

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