Chilean Peso Leads Losses as Central Bank Boosts Its Reserves

Chile’s peso tumbled the most in the world, starting the year in volatile fashion as many had forecast -- though not for any of the reasons people expected.

The currency dropped 2.1% to 741.66 per dollar, bringing its decline this year to 4%. That makes it the worst-performing of 24 emerging-market currencies tracked by Bloomberg.

The reason is simple. Chile’s central bank announced Wednesday that it plans to boost its foreign reserves, buying $40 million a day for more than a year until its holdings reach 18% of gross domestic product. That should ultimately provide some stability in a year that will see two elections and the drafting of a new constitution following the worst social unrest in more than a generation.

Chilean Peso Leads Losses as Central Bank Boosts Its Reserves

“In the long term, it could provide a bit of market confidence at a time of macro and fiscal uncertainty,” said Danny Fang, a strategist at BBVA in New York.

In a separate statement on Wednesday, the central bank said that the measures do not equate to currency intervention, and that it will allow exchange rates to fluctuate in line with their fundamentals. The increased reserves will prepare policy makers for potential future shocks, it added.

The increase will bring the nation’s reserves closer in line with regional peers. With the current plan, Chile will surpass Mexico -- which has about 15% of GDP in reserves -- but still lags behind Brazil’s 19%.

Social Unrest

The dollar purchases will more than compensate for the $2.55 billion the central bank spent to bolster the peso between December 2019 and January 2020 after a wave of social unrest undermined investor confidence. The purchases will be completed by the time a Flexible Credit Line with the International Monetary Fund ends in May 2022.

“The measure is necessary to strengthen Chile’s external buffers, particularly in light of the experience following the October 2019 protests,” Paulo Mateus, an analyst at Goldman Sachs in New York, wrote in a note.

Chilean markets could be under significant pressure this year as investors await the outcome of an April election that will decide the makeup of a Constituent Assembly in charge of drafting the nation’s new constitution. Many investors credit the current charter for underpinning more than three decades of rapid growth and fiscal discipline.

For the left, on the other hand, the new Assembly is an opportunity to overthrow the legacy of unfettered capitalism of Augusto Pinochet’s dictatorship and the inequalities it enshrined.

With the dollar purchases announced Wednesday, the central bank is bolstering its firepower ahead of any instability.

©2021 Bloomberg L.P.

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