Chile’s peso fell to a one-year low and swap rates dropped as reports indicated a weakening economy and central bank minutes signaled that policy makers may begin reducing borrowing costs.
The currency depreciated 0.8 percent to 515.29 per U.S. dollar at the close of trading in Santiago, the lowest since June 2012. The two-year swap rate fell seven basis points, or 0.07 percentage point, to 4.50 percent. It earlier reached 4.48 percent, the lowest intraday level since July 17.
Minutes of the central bank’s July 11 meeting showed that policy makers expected to start lowering rates “in the near future” if the economy continued to slow. Economic reports indicated that manufacturing declined more than forecast in June and retail sales grew less than forecast.
“The minutes were predictable, but not the data,” Sebastian Ide, the head of rates trading at Banco de Chile in Santiago, said in a telephone interview. “What was a future scenario is now a present case. It cements the idea that a cut is justified. The only thing that could change that view now would be a big inflation surprise.”
Policy makers considered what would have been the first cut in the target lending rate since January 2012 before voting to hold it at 5 percent, the minutes showed. It was the third straight month that they considered reducing borrowing costs.
The yield on five-year fixed-rate bonds fell four basis points to 5.10 percent. The yield on five-year inflation-linked bonds declined two basis points to 2.21 percent.
The economic reports were “a major blow to the hawkish case” for the central bank to avoid cutting borrowing costs, George Lei, a strategist at Nomura Holdings Inc., wrote today in a research note to clients. He recommends that investors stop betting that the one-year swap rate will keep falling because it already projects a 50 basis point rate cut.
Flavia Cattan-Naslausky, a strategist at Royal Bank of Scotland Group Plc, recommended that investors use one-month non-deliverable forwards to wager that the Chilean peso will weaken against the Brazilian real. Brazil’s central bank may raise its target lending rate even as Chile starts lowering its benchmark, she wrote today in a research note.
Budget data published today showed that the government sold $4.2 billion of dollars in May and June, bolstering the peso, according to Banco Bilbao Vizcaya Argentaria SA. Chile will probably sell just $800 million more this year, “leaving the path free for the peso to depreciate,” Jorge Selaive, the chief economist of the bank in Santiago, wrote today to clients.