Chile Peso Falls Most in Emerging Markets on Dovish Central Bank

  • Traders are pricing in a rate cut in six months as GDP shrinks
  • Central bank moved to a neutral policy stance this month

Chile’s peso fell the most in emerging markets amid speculation that the central bank is becoming more likely to lower interest rates even as the Federal Reserve raises U.S. borrowing costs.

The peso slid 1.3 percent Monday as of the close of trading in Santiago to 668.95 per dollar, the lowest since June. The currency’s decline this month has been the steepest in emerging markets. At the same time, the price of copper, Chile’s main export, approached a one-month low, falling 1.1 percent today to $2.153 a pound in New York.

The peso is weakening after the central bank earlier this month changed its policy bias to neutral from hawkish, a move that is perceived as a precursor to a shift to an easing cycle that could result in a lower benchmark rate later this year. The central bank’s change in stance, which coincides with mounting speculation that the Fed will raise its target rate this year, makes borrowing dollars to invest in the peso less attractive.

“It puts the weight on a likely full turnaround in the monetary-policy stance,” said Alejandro Cuadrado, a currency strategist at Banco Bilbao Vizcaya Argentaria SA in New York. “We had been expecting a move to neutral and we got it in the last statement. Now, we expect that with sluggish growth and inflation falling back to well within the target range, there could be room for more significant moves.”

The peso is weakening after it reached 642.95 per dollar earlier this month, the strongest in more than a year.

Data published Thursday showed that Chile’s economy contracted in the second quarter for the first time since 2010. Traders in the Chilean swaps market expect the central bank to lower the benchmark rate by a quarter point to 3.25 percent in the next six months.

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE