Chile Peso Declines to Three-Year Low After Central Bank Signal

Chile’s peso fell to the lowest level since July 2010 after the central bank said it may cut borrowing costs in coming months to support the economy.

The currency depreciated 1.3 percent to 539.90 per U.S. dollar at 12:49 p.m. in Santiago, the biggest drop among 24 developing-nation counterparts tracked by Bloomberg. The peso extended its decline this week to 1.9 percent, the biggest since the end of November. The two-year swap rate fell three basis points, or 0.03 percentage point, to 4.10 percent, the lowest on a closing basis since October 2011.

While the central bank held benchmark borrowing costs at 4.5 percent yesterday, the policy committee added language to the statement saying that further stimulus may be necessary. The economy expanded 2.8 percent in November and October from a year earlier, the slowest pace since July 2011. With inflation expected to slow from the 3 percent target in December and growth easing more than expected, the bank said it may cut rates this year.

“People weren’t expecting cuts, but the outcome was more dovish than expected,” George Lei, a strategist at Nomura Securities Inc., said in a telephone interview from New York.

Lei recommended today that traders bet that the real will beat the Chilean peso after Brazil’s central bank lifted borrowing costs to 10.50 percent on Jan. 15. The peso tumbled 1.2 percent to 228.58 per real, the weakest since Dec. 10. Investors can earn 4 percent a year by borrowing in Chile and buying higher-yielding assets in Brazil, Lei said.

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