Nov. 29 (Bloomberg) -- Chile’s peso may be headed for a rebound after the central bank’s two consecutive reductions in borrowing costs helped the currency tumble to its weakest level since October 2011, technical indicators show.
The 14-day relative strength index for the dollar versus the peso rose today to 74.7, above the level of 70 that indicates declines in the Chilean currency may be hard to sustain. The currency also traded outside its Bollinger band, indicating to some analysts that the probability that it will keep weakening is less than 2.5 percent.
The peso posted its biggest monthly decline since May as policy makers’ decision to lower the overnight rate by a quarter-percentage point in October and November to 4.5 percent eroded the yield advantage of borrowing in dollars and investing in pesos. Currency forwards signal further rate cuts even as economic reports and comments from central bank President Rodrigo Vergara indicate that policy makers may hold off from further reductions.
“There could be some overshooting,” said Fernando Soto, an economist at Banco Bilbao Vizcaya Argentaria in Santiago who forecasts the peso rallying to about 525 per dollar. “It’s odd the depreciation didn’t revert today given the data, but the central bank should maintain the rate unchanged for the next couple of meetings at least. Any cuts should be slow and paused.”
The currency dropped 0.7 percent to 532.27 per dollar at the close in Santiago, its weakest level since October 2011, in a fifth straight day of declines. The peso extended its drop for November to 3.5 percent.
Two rate cuts in two months don’t mean the central bank will keep cutting at the same pace, Vergara told La Tercera in an interview published on Nov. 24.
Chile’s retail sales expanded 13.4 percent in the year through October, almost double the 7 percent increase forecast by analysts surveyed by Bloomberg, a report showed today.
Foreign investors have withdrawn $4.4 billion from the peso forwards market since the surprise interest-rate cut on Oct. 17. The three-month implied yield in the peso forwards market fell 0.49 percentage point this week to 3.95 percent and reached the lowest since March 2011 yesterday.
In technical analysis, investors and analysts study charts of trading patterns to forecast changes in a security, commodity, currency or index. Bollinger bands, developed by John Bollinger in the 1980s, are used to signal turning points in an asset’s trajectory.
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