Latin America Currency Divergence Tells Tale of Two Commodities

  • Colombian, Chilean peso were top and last in region in August
  • Correlation between currencies and oil, copper rose last month

The only thing they had in common this month was the name.

As the Colombian peso posted the best performance in emerging markets in August, propelled by a jump in crude oil, a plunge in the price of copper pushed the Chilean peso to its worst monthly performance since May. Oil is Colombia’s biggest export, while Chile is the world’s biggest producer of the industrial metal.

"Oil helped the Colombian peso and copper didn’t help the Chilean peso," said Mario Castro, a strategist at Nomura Holdings Inc. in New York. 

Both currencies are the most tightly correlated with the commodities in at least 10 months, according to data compiled by Bloomberg. The Colombian peso gained 3.8 percent in August as crude advanced 8 percent amid a fall in global supplies and as planned talks by OPEC fan speculation that the organization could reach an agreement to limit output. The Chilean peso is heading to a 3.5 percent loss in August as the price of copper slumped 6.8 percent amid concern that Chinese demand will slow.

Of course other factors are also in play. In Colombia, the peso gained on bets economic growth will benefit from the historic peace treaty reached between the country’s largest rebel group and the government.

That will “improve the country’s credit ratings as well as significantly increase investor confidence," Miguel Benedetty, an analyst at INTL FCStone Ltd in New York, said by e-mail.

Concern about growth in Chile is sending its peso lower. In August, consumer confidence reached the lowest since September 2008, while investor confidence is near a seven-year low, according to surveys by business chamber Sofofa. The country is forecast to grow 1.7 percent this year, the lowest since the financial crisis, down from a 3 percent growth estimate a year earlier from analysts surveyed by Bloomberg.

The slowdown is leading traders to start betting on a possible interest rate cut by the central bank. The monetary authority dropped its hawkish bias last month and adopted a more dovish tone, which also pressured the peso, Mariel Gil, an analyst at INTL FCStone, said in a separate e-mail.

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