Chile Peso Is Sinking Fast, But Central Bank Unlikely to Step In

(Bloomberg) -- The last time Chile’s peso fell like this, in the midst of the biggest political demonstrations in decades, the central bank intervened to stop the panic. This time it’s likely to sit things out because the drop is tied to a global phenomenon: the grim outlook for Chinese growth as the coronavirus spreads.

Few countries are as dependent on Chinese demand as Chile, which exports the bulk of its copper production to the country, and the peso has had its worst start to the year this century amid concern the virus could turn into a devastating global epidemic. It weakened 6.1% and is testing the 800 per dollar mark for the second time in less than three months.

In October and November, an outbreak of often violent protest and looting, and an agreement by lawmakers to call a plebiscite on a possible new constitution, helped send the peso to a record low and prompted the central bank to announce a $4 billion swap program to ease liquidity. This time, the bank will probably just stand aside and let markets do their thing.

“We believe policy makers are generally comfortable with letting the peso slide and take the adjustment,” said Alejandro Cuadrado, the head of foreign-exchange strategy at Banco Bilbao Vizcaya Argentaria in New York. “Especially if its externally driven, with a drag from copper and not fully decoupled from other emerging markets.”

Chile Peso Is Sinking Fast, But Central Bank Unlikely to Step In

The Chilean peso slid 4% against the dollar in three days back in November, weakening as far as about 830 per dollar, an all-time low. The currency lost about 2.9% this week to 801.

China takes about one-third of all Chile’s exports and a much larger portion of its main export, copper. While the metal has declined as a percentage of Chile’s exports over the years, it’s still 48%. And some of the decline in importance of copper can be explained by rising Chinese demand for other Chilean products, like fruit and wine. China now buys 20% of Chile’s fruit and wine exports, up from less than 1% a decade ago.

Chile Peso Is Sinking Fast, But Central Bank Unlikely to Step In

The peso’s weakness isn’t all bad news for Chileans. While the price of Nymex copper has fallen 43% since the end of 2010 and 24% since the end of 2017 in dollar terms, if you measure it in pesos it was at an all-time high two weeks ago. That matters when you consider that wages paid at copper mines, as well as payments to subcontractors, are in local currency.

Chile Peso Is Sinking Fast, But Central Bank Unlikely to Step In

Offshore accounts have increased short positions in the peso by $2.2 billion this year, according to central bank data through Wednesday. That’s offset though by a $2.8 billion increase in long positions from local accounts, mostly pension funds. It’s hard to link the shift in positioning directly to the coronavirus outbreak. Pension funds need to go long the peso to hedge currency risk when they increase exposure to foreign equities, so the changes may just point to bullishness on global stocks.

“External factors have been the driver of the depreciation in the past week,” said Benito Berber, chief Latin American economist at Natixis North America. “This dynamic might continue in the coming weeks, but if you ask me about the forecast of the CLP by year end, I think it would be closer to 750 than to 800.”

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