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Chilean Peso Volatility Tumbles as Growth Offsets Drop in Copper

Fluctuations in Chile’s peso touched the lowest level on record as the nation’s accelerating economic growth offset a plunge in copper.

Implied volatility on one-month options for the Chilean peso versus the dollar fell to 7.15 percent today, the lowest intraday level since Bloomberg began tracking the data in 2010, before it was unchanged at 7.16 percent. The currency was little changed at 475.02 per dollar at the close in Santiago. The peso has traded in a range of 473 to 476 per dollar since Dec. 10. International investors in the peso forwards market had a $5 billion short position on Dec. 18, the lowest since March 5.

Expectations for rising interest rates have also helped slowed depreciation while speculation the central bank may intervene to weaken the currency has prevented it from rallying. Falling volatility in the peso means that options for exporters and others to hedge against changes in the price of the currency become cheaper.

“Volatility has been very low in the past two weeks,” said Felipe Alarcon, an economist at Banco de Credito & Inversiones in Santiago. “There’s more consensus about where the exchange rate should be. The central bank has a floor below 470 and as the peso appreciates toward that level enthusiasm flags, but economic growth and rates set a ceiling.”

Chile’s economic activity expanded 6.7 percent in October from a year earlier, the fastest pace this year, a Dec. 5 report showed. The median forecast of 16 analysts polled by Bloomberg was a 6.2 percent increase.

The central bank indicated on Dec. 18 that the target lending rate will remain at 5 percent after policy makers reduced their inflation forecasts and raised growth estimates.

Copper for March delivery dropped as much as 2.3 percent today to a December intraday low. The metal makes up more than half Chile’s exports.

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