Foreign Investors ‘Stampede’ Out of Chile Peso as Copper Falls

  • Swaps curve not seeing rate rise until December of this year
  • Peso is the world’s worst-performing over past five days

Foreign investors dumped the Chilean peso at the fastest pace since July during the first three days of this week.

Offshore accounts increased their net short position on the peso in the currency forwards market by $1.3 billion in just three days after data showed imports into China fell faster than expected in April, according to data from Chile’s central bank.

The Chilean peso, which reached a nine-month high as recently as April 20, weakened 3.7 percent in the last five days amid signs of a slowdown in China and a decline in the price of copper, the country’s largest export. The currency is the worst-performing in emerging markets as copper fell while oil, which Chile gets almost entirely from imports, rose.

"It has been a stampede," Felipe Alarcon, an economist at Euroamerica, said by phone. Before this slump, the peso had been propped up by local demand for the currency partly as local companies sold dollars to pay dividends in pesos, Alarcon said. That domestic demand has now evaporated.

The peso fell 0.8 percent as of 11:53 a.m. in Santiago on Friday to a two-month low of 690.49 per U.S. dollar.

Another factor that is keeping foreign investors away from the local market is that Chile’s swap curve is pricing in that the central bank will raise rates no sooner than December, Alarcon said. That diminishes the attractiveness for investors looking to profit from higher local interest rates.

Forward points, or the spread between the spot peso price and the forward price, rose to 6.44 pesos for three months on Friday from 5.47 pesos per dollar on May 2.

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