Chile Peso Rout Stifled by Central Bank Verbal Intervention

(Bloomberg) -- Chile’s central bank moved to halt a rout in the peso as plans for a new constitution after weeks of protests stoked concern of fundamental change to the country’s free-market economy.

The peso weakened 2.8% to 781.87 per dollar at 1:18 p.m. after falling as low as 800.08, the biggest intraday move since 2011. Stocks and bonds also fell.

Central bank President Mario Marcel reiterated policy makers’ “willingness to act in the face of anomalous situations,” saying it has a “variety of instruments at its disposal.“ Current uncertainty “should be contrasted with the economic fundamentals” which remain solid, he said in a statement.

The comments were enough to stabilize the peso, which had been in free fall for much of the morning as a national strike added to pressure on a government struggling to respond to more than three weeks of riots and protests.

“It’s definitely a verbal intervention,” said Claudio Soto, an economist at Banco Santander Chile. “The most important part is when it says it has the tools. It’s showing that it has a gun, a cannon, in case it were necessary.”

Soto said he doesn’t expect more from the bank for now as “intervention levels are higher than this.”

Civil Unrest

Chile has been wracked for more than three weeks by protests and riots against the rising cost of living and inequality. While the government has made concessions, including increased spending and a pledge to draw up a new constitution, it has failed to halt the demonstrations.

The weaker peso “is obviously a sign of concern that we are following closely, as this will have an effect on prices, inflation and products that we consume,” Finance Minister Ignacio Briones said, referring to the drop in the peso. “It’s fundamental that all of us Chileans make an effort that things return to normal as soon as possible.”

New Constitution

The government gave its backing to plans to write a new constitution on Sunday in an attempt to placate protesters. Yet, today’s national strike still went ahead and thousands packed out city centers across the country in fresh demonstrations.

“Today it’s just concern because people don’t know what’s going to happen with the constitution,” said Sebastian Ide, head of trading at Banco de Chile in Santiago. “The outcome could be very good or very bad and it’s that uncertainty that generates this kind of run.”

The drop in the peso is beginning to damp expectations for further interest rate cuts. Interest-rate swaps jumped, and now show one more 25 basis-point rate cut in the next six months instead of the two seen last Friday. The five-year peso camara rate rose 15 basis points, on course for the biggest jump in three years.

Chilean government bonds dropped. The yield on CPI-linked BTU 2026s rose 32 basis points to 0.4%, while the yield on the peso 2026 BTPs increased 27 basis points to 2.98%.

Construction companies led losses on the stock exchange with Salfacorp falling 8.4%. Stocks with revenue in dollars suffered less, with Enel Americas, which holds assets in the rest of Latin America and not in Chile, falling only 1.5%. Since the unrest began on Oct. 18, the IPSA has slumped 13% and about $25 billion in market value has been destroyed.

While port workers and some miners laid down tools Tuesday, many of the giant copper mines in the north and Santiago’s airport were working normally. Barricades on some of the highways into Santiago impeded traffic, while clashes with the police broke out near the mining town of Calama. Valparaiso’s train system was also on strike, while workers from the state oil refinery marched through the town of Concon.

--With assistance from Sebastian Boyd and Eduardo Thomson.

To contact the reporters on this story: Philip Sanders in Santiago at psanders@bloomberg.net;Maria Jose Campano in Santiago at mcampano@bloomberg.net

To contact the editors responsible for this story: Carolina Wilson at cwilson166@bloomberg.net, Philip Sanders

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