Chile Peso Is Traders’ Top Latin America Pick After Rough 2014

Chilean Peso and Copper

Chile’s peso is fast becoming the darling of traders and investors in Latin America as the nation shows signs of being first in the region to exit an economic slump.

The peso is the region’s best performer this month, and foreign investors have boosted wagers on further gains to the highest in two years. It’s quite a turnaround for a currency that in 2014 suffered its biggest loss versus the dollar since the global financial crisis.

A growing expectation that the central bank will raise interest rates this year -- a move that would enhance the attractiveness of Chilean assets -- has stoked the peso’s advance. Chile is also the only major economy in the region where analysts are raising their 2015 growth forecasts, spurring prospects for new investment.

“The money goes where the yields are, and while growth expectations in the rest of Latin America keep getting cut, we’ve touched bottom,” said Felipe Alarcon, chief economist at EuroAmerica in Santiago. “Chile stands out amid the mediocrity.”

The peso has climbed 0.6 percent this month, briefly appreciating through 600 per dollar for the first time since November. It ended last week at about 609, up more than 5 percent from its six-year low in March as the prospect of an imminent U.S. rate increase was pushed back. EuroAmerica said the currency may surpass 600 again in the short term.

The Chilean currency slid 13 percent last year, which increased the cost of imports and pushed inflation above the central bank’s target for 12 straight months.

Rates Outlook

On the other hand, cheaper oil and gas imports mean Chile now has the smallest current-account deficit in the region. Gross domestic product expanded at the fastest pace in a year in the first quarter, driven by domestic demand.

Inflation remains an issue, and the peso’s weakness until two months ago means the central bank doesn’t expect to bring price increases below its 3 percent goal until 2016.

Hence the interest-rate outlook. Economists in a Bloomberg survey raised their year-end rate forecast to 3.05 percent on May 19, compared with a current benchmark of 3 percent, after Banco Central de Chile warned traders they were underestimating the potential for an increase.

Valdes Appointment

“While rate hikes in the U.S. are being pushed back, the risk in Chile is that if inflation remains persistent, there could be a hike sooner than expected,” said Joaquin Reichhardt, head trader at Santiago-based brokerage Intervalores.

Foreign investors are responding by increasing their bets on the Chilean peso at the fastest pace in almost a year. They cut net-short positions by $6.6 billion in the two months through May 18, according to central-bank data.

President Michelle Bachelet gave the peso a lift this month when she fired her finance minister, replacing him with a former Barclays Plc economist who strategists say will be more pro-business.

Rodrigo Valdes was also chief economist at Chile’s central bank and served as a deputy director at the International Monetary Fund until 2012. His predecessor was widely blamed for 14 months of conflict with the business community, just as a funding scandal sent Bachelet’s approval rating tumbling to an all-time low.

Latin Favorite

Standard Chartered Plc, which gets more than half of its revenue from emerging markets, considers the peso its favorite currency in Latin America and has cited Valdes’s appointment as a “positive.”

The U.K.-based lender changed its recommendation on the peso on May 1 from “neutral” to “overweight” -- the only currency in the region to merit the designation. Standard Chartered has an “underweight” rating on the Brazilian, Mexican and Colombian tenders.

“It’s natural to believe the economy will rebound sooner than other countries in the region,” said Italo Lombardi, an economist at Standard Chartered in New York.

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