For Chile’s Peso, It May Be Darkest Just Before the Dawn

(Bloomberg) -- As Chile’s peso drops to the lowest levels in almost two years, investors can take solace from the performance of the sol in neighboring Peru.

The peso is falling as Chile braces for the second round of a deeply divisive presidential election on Dec. 19 that may usher in the most left-wing government in half a century. Peru has been there and done that -- and the sol, while not rebounding, is at least holding its own since the vote result was confirmed in July. 

Chile’s peso has sunk more than 15% against the dollar this year as the election approaches and a new assembly rewrites the country’s constitution, prompting many of the rich to take their savings abroad. It touched the And while the election may not bring an end to the currency’s woes, it will at least stop fueling the decline, especially given this year’s rally in copper prices.

“The uncertainty should dissipate after the election,” said Edwin Gutierrez, an investor at Aberdeen Asset Management in London, who’s overweight on Chile’s local debt. And with that, “we think the peso will stop underperforming.”

Just look at Peru’s sol. The currency tumbled 8.2% between April 9, right before the first-round of the presidential vote produced a surprise lead for leftist Pedro Castillo, and July 19, when he was formally proclaimed president-elect. Since then, the sol has fallen only 2.7%, despite constant political turmoil in the Latin American nation, less than gains in the greenback against a basket of currencies. 

Chile’s election runoff may not even end with a victory for the left-wing candidate Gabriel Boric as rival Jose Antonio Kast gains in the polls. Kast wants to slash taxes and fiscal spending, the opposite to Boric and President Pedro Castillo in Peru.

Copper Strength

Copper, which accounts for well over half of Chilean exports, is also set to buttress the Chilean peso. The metal has soared almost 22% this year, pushing monthly exports to record highs.

In the last few months, the correlation between the peso and copper has reasserted itself after collapsing earlier in the year.

The peso should strengthen toward 780 per dollar early next year, rallying about 8% from Friday’s close on the back of “strong commodity prices,” according to Luis Hurtado, a Toronto-based strategist at CIBC.

Still, the currency weakened again on Monday as traders await the election and this week’s central bank decision, where policy makers are expected to raise the key rate by 125 basis points, according to a Bloomberg survey. 

The Risks

Few expect it to be plain sailing for the peso next year. Firstly, copper prices are vulnerable to any downturn in China, where the property giant Evergrande is poised to undergo a debt restructuring. 

Anupam Damani, New York-based portfolio manager and head of international and emerging market debt at Nuveen, said she will remain cautious until the outcome of the constitutional assembly is known.  

“Markets will continue to wait for the re-writing of the constitution even though we may have the political risk out of the way in terms of the election,” Damani said.

A stronger dollar and higher U.S. yields may also weigh on Latin American currencies next year, particularly in the first half, Morgan Stanley strategists led by Matthew Horbach, Head of Global Macro Strategy, wrote in a client report. Morgan Stanley sees more resilience in Andean currencies than their regional peers.

LAST WEEK

Chile’s Treasury sold $1.3 billion of peso-denominated 2024 bonds abroad on Thursday. There were no corporate bond sales last week in the local market, while metals processing company Molibdenos y Metales SA sold 4 billion Mexican pesos ($190 million) in 4- and 6-year bonds in that market, according to a filing to the regulator.

The annual inflation rate surged to the highest since 2008 in November, reaching 6.7%, while the monthly figure stood at 0.5%, the national statistics agency reported last Tuesday. 

AGENDA

• In Chile:
  • Dec. 14: Central Bank’s Rate Decision
• International:
  • U.S.:
    • Dec. 14: Nov. PPI
    • Dec. 15: Dec. Empire Manufacturing
    • Dec. 15: Rate Decision
    • Dec. 16: Nov. Industrial Production
    • Dec. 16: Dec. Markit Manufacturing PMI
  • China:
    • Dec. 8-15: Nov. Money Supply
    • Dec. 14: Nov. Retail Sales
  • Eurozone:
    • Dec. 16: Dec. Markit Manufacturing PMI
    • Dec. 16: ECB Rate Decision
    • Dec. 17: Nov. CPI

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