Chilean Peso Drops Most in Emerging Markets as Economy Contracts

Chile’s peso fell the most in emerging markets as copper slid and a report showing the economy unexpectedly contracted in March fueled speculation that the central bank will cut borrowing costs next week.

The currency slumped 1 percent to 568.15 per dollar at the close in Santiago, the weakest since March 19. Futures on copper, the nation’s biggest export, dropped 0.6 percent to $3.0505 per pound. The implied 12-month yield in the peso forwards market retreated seven basis points, or 0.07 percentage point, to 3.57 percent in the biggest decline in almost four weeks. The five-year swap rate decreased three basis points to a five-year low of 4.29 percent.

The central bank reported today that economic activity, a proxy for gross domestic product, shrank 0.2 percent in March from a month earlier, compared with an increase of the same amount forecast by analysts surveyed by Bloomberg. Monthly inflation slowed to 0.2 percent in April, according to the median estimate before a report from the national statistics agency scheduled for May 8.

“We’re getting used to slower growth,” Cristian Donoso, a trader at Banchile Inversiones in Santiago, said by phone. “If inflation in April is close to zero, that creates space for the central bank to lower the rate next week.”

Trading in the forwards market for unidades de fomento, Chile’s inflation-linked accounting unit, shows consumer prices rose 0.15 percent last month.

Policy makers are due to decide on borrowing costs on May 15 after holding the target lending rate at 4 percent last month and lowering the benchmark by a quarter-percentage point in March and February.

Foreign investors have increased bets against the currency. The net short peso position of offshore investors climbed on April 30 to $14.9 billion, the highest level since March 20, according to central bank data.

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