Chilean Peso Extends Fall as Central Bank Dispirits Forex Markets

Bloomberg — The Chilean peso (CLP) plummeted to a record Thursday after the central bank disappointed traders by delivering a smaller interest-rate hike than they were expecting.

The currency tumbled as much as 2.7% to an unprecedented 1,037.18 per dollar, leading losses among all currencies tracked by Bloomberg. Local swap rates erased an initial drop to rise about two basis points across the curve, as traders bet policy makers will have to take a more hawkish stance in the future.

Chile’s central bank raised its key interest rate by 75 basis points to 9.75% on Wednesday, meeting the forecast of some economists but falling short of matching swap rates traders’ expectations. Before the decision, the swaps curve priced in more than a full percentage point hike, as the peso’s selloff over the last month led investors to bet on a more aggressive response from policy makers.

VIEW +

Chile’s Inflation Forecasts Darken As US Dollar Rises

Analysts consulted by Bloomberg Línea see the depreciation of the Chilean currency against the US dollar exacerbating inflationary pressure in July and August

“Traders were waiting for more. The central bank is losing credibility,” said Alvaro Vivanco, head of emerging-market strategy at NatWest Markets. “Arguing that it is all about the dollar and Chinese growth when the peso is the worst EMFX performer will not do the trick.”

The outlook for the peso will depend on copper prices if policy makers don’t act, according to Vivanco, who predicted a 150-basis point rate hike. Seven of 21 analysts surveyed by Bloomberg forecast a 75-basis point move, while another 11 had expected a smaller increase of 50 basis points and two were betting on a full percentage point move.

Chile’s central bank has now raised interest rates 9.25 percentage points in the past year. Yet, inflation has continued to accelerate, reaching its fastest pace since 1994 and with no signs of slowing to the target any time soon. Economists surveyed by the central bank raised their forecast for year-end inflation to 11% from 10% in a poll released Tuesday, and their 2023 prediction to 5.1% from 4.6%.

The peso, in the meantime, is down 16% versus the dollar over the past month and more than 20% since reaching a peak in early June. This has prompted Credit Agricole to call for borrowing costs to rise to “punishing levels” to prevent a currency crisis in the absence of more direct intervention in the foreign exchange market.

VIEW +

As Fears Grow Over a Global Recession, Investors Favor Countries with Low Interest Rates

That’s a reversal from the first months of the year, when low-yielding bonds were dumped in favor of debt from nations like Brazil and Chile, which led the world’s tightening cycle

Chile’s central bank isn’t showing signs it will intervene into the foreign-exchange market despite a rapidly declining peso, according to Goldman Sachs. Economists including Sergio Armella wrote in a note Thursday the nation’s policy makers noted markets have been able to properly absorb shocks and that foreign-exchange market volatility has not been transmitted to other parts of the financial system.