Chile’s peso fell the most among emerging-market counterparts as traders exited bets on the currency after the central bank unexpectedly lowered its benchmark interest rate last week.
The currency depreciated 1 percent to 501.95 per U.S. dollar at the close in Santiago, the biggest drop since Aug. 19. The peso extended its decline after touching a level weaker than 500 for the first time since Oct. 10.
“The market wasn’t expecting a cut and was short dollars,” said Eugenio Cortes, the head of currency forwards at EuroAmerica Corredores de Bolsa SA. “On Friday, people were defending their positions, but above 500 we saw some alarms going off, and we have seen stop losses.” The peso may decline to 505 to 506 per dollar, Cortes said.
The central bank surprised all except two of the 19 economists surveyed by Bloomberg when it cut the target lending rate on Oct. 17 for the first time since January 2012, lowering it by a quarter-percentage point to 4.75 percent. Before the decision, foreign investors had a $6.2 billion net short peso position, the smallest in five months. A short is a bet an asset will decline in value.
The two-year swap rate fell seven basis points, or 0.07 percentage point, to a 15-month low of 4.38 percent. Traders are projecting a second quarter-point rate cut in November and a further reduction to 4.25 percent in the first half of next year, according to Banco de Chile research.