Chile’s central bank announces intervention as peso hits record low
SANTIAGO Chile’s central bank announced it was intervening in the currency market after the peso fell to a record low for the second consecutive day.
The bank will sell as much as US$10 billion on the spot market and provide as much as US$10 billion of currency hedges, according to a statement on its website Thursday. Policy-makers will inject liquidity into the system through swap and repo operations announced last week to sterilize the impact of the dollar purchases.
“This meets all of the conditions of a meaningful intervention,” said Nathan Pincheira, an economist at financial services firm Fynsa. “It’s credible, it’s a significant amount and it’s well communicated.”
The peso has weakened 13 per cent against the dollar in the past month as the worst social unrest in a decade threatens to stall economic growth. The violent protests have forced the closure of shops, paralyzed much of the public transport system and led many people to cut short their working hours. The government has estimated the damage to state property alone at US$1 billion.
The central bank has US$39.7 billion in foreign currency reserves, which have been little changed over the past seven years. The last time it intervened directly in the market was back in 2011, but that was to weaken the peso, not strengthen it.
The intervention comes two weeks after the bank said it is monitoring the situation in the currency market and then announced a US$4-billion short-term dollar swaps and repo program to improve liquidity after a spike in short-term dollar interest rates.
Due to the unrest and to provide more information to the market, the central bank has brought forward its next rate decision by two days to Dec. 4. The quarterly monetary report, which includes estimates for growth and investment, will be on Dec. 5 as opposed to Dec. 9.
“There’s debate on whether the depreciation is because of assets being incorrectly priced and fund flows or if the country as a whole is just poorer and the exchange rate is showing that,” said Pincheira. “We tend to ascribe to the first thesis, but you can’t also discard that Chile’s long term macro conditions have deteriorated.”
Interest-rate swaps are now discounting that the central bank will keep its key policy rate unchanged at 1.75 per cent, while one week ago swaps were discounting a 25 basis-point cut in the next six months.
Other Latin American currencies have also been weakening amid the political turmoil, with the Colombian peso dropping to a record low on each of the past two days. The Brazilian real closed Wednesday at a record low of 4.26 per dollar, even after the central bank intervened in the market four times this week.