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Chile Peso Outstrips Colombian Currency Weakened by Central Bank

Aug. 27 (Bloomberg) -- Chile’s peso climbed to its strongest this year relative to Colombia’s currency after policy makers in Bogota lowered interest rates and expanded the central bank’s dollar buying program.

The Chilean peso strengthened 0.5 percent to 3.7897 Colombian pesos as of 2 p.m. in Santiago, its highest closing level since Dec. 8. Chile’s currency was little changed against the U.S. currency, closing at 481.05 per dollar.

Chile’s peso is outperforming Latin American peers as faster-than-forecast growth leads traders to wager the central bank will leave benchmark borrowing costs unchanged this year. Two rate cuts at Colombia’s central bank and pledges by monetary officials and the government to buy dollars have stemmed gains in that country’s peso, which was the world’s best performer versus the dollar in the first half of 2012.

“The additional intervention wasn’t a big deal but they have shown that they have options,” said Flavia Cattan-Naslausky, a currency strategist at RBS Securities Inc. in Stamford, Connecticut. “Chile has been doing very well despite everything. Macroeconomic growth has been strong and, unlike Colombia and Brazil, the Chileans aren’t rushing to cut rates.”

Colombia reduced borrowing costs for a second straight month on Aug. 24 after inflation slowed to the target rate, while also announcing that the central bank will buy $700 million by the end of September to curb gains in the peso.

Rate Outlook

In Chile, the median forecast of 51 traders and investors surveyed by the central bank for an Aug. 22 report was that the bank would leave rates unchanged at 5 percent through December. Gross domestic product grew 5.5 percent in the second quarter from a year earlier, faster than economists had forecast.

Chilean domestic demand may grow 6.7 percent this year as the stronger currency cheapens imports, economist Javier Salinas at Larrain Vial SA wrote today in a note to clients. Larrain Vial raised its growth forecast for this year to 5.3 percent from 5 percent.

International investors in the Chilean peso forwards market increased their short peso position to a three-week high of $8.9 billion on Aug. 23.

Inflation-linked swap rates in Chile reached five-month lows today as traders priced in faster-rising prices and reacted to the decline in swap rates in other currencies such as U.S. dollars, Australian dollars and British pounds.

The one-year swap rate in unidades de fomento, Chile’s inflation-linked currency unit, fell seven basis points to 1.67 percent, heading for the lowest close since March 15. The two-year rate fell four basis points to 1.82 percent.

The one-year swap rate in pesos fell three basis points to 4.88 percent. One-year breakeven inflation, a measure of the average future rate of price rises implied by the gap between inflation-linked and nominal swaps, rose four basis points to 3.16 percent.

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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