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MARKETS LIVE BLOG: Dovish Chilean Central Bank May Stall 8% Peso Rally

Chilean Peso Rallies 8% This Quarter, Analysts Expect 0.5% Rate Cut Amid Dovish Central Bank Policy

By Athena Xu

5/23, 13:28 EDT

Key Takeaway

  • The Chilean peso surged 8% this quarter, driven by a 28% rise in copper prices, but dovish central bank policies could stall its rally.
  • Chile plans to tap international debt markets again, repurchasing peso bonds due in 2025-2033 amid the currency's recent strength.
  • The Philippine peso fell 0.4% to near-record lows; Bangko Sentral ng Pilipinas may cut rates by up to 50 basis points this year.

Peso Appreciation and Central Bank Policy

The Chilean peso has experienced a significant appreciation, making it the best-performing currency this quarter with an 8% increase. This surge is largely attributed to the rally in copper, Chile's primary export, which has risen over 28% from its February low. A stronger peso results in cheaper imports and reduced inflationary pressure, potentially allowing Chilean policymakers to adopt a more dovish stance. Analysts surveyed by Bloomberg unanimously expect a half percent rate cut, which is already fully priced in.

However, a more dovish central bank could stall the peso's rally. In the first quarter, the peso declined by 7.4% due to aggressive rate cuts despite the currency's downtrend. Currently, rate swaps are pricing in approximately 140 basis points in cuts over the next six months. Inflation in Chile rose to 4% in April from 3.7% in March, which could make traders more sensitive to any dovish guidance from the central bank.

Global Peso Debt Sale

Chile is planning to tap international debt markets for the second time this year, offering to buy back some of its global peso bonds. The nation is repurchasing notes denominated in pesos due in 2025, 2026, 2028, and 2033. This tender offer is contingent on the sale of similar securities. The new bond deal follows the peso's impressive rally this month, where it rebounded 6.2% against the US dollar in May, outperforming over 140 peers tracked by Bloomberg. Despite this, the currency fell by 2% on Wednesday as the local market reopened after a holiday and copper prices weakened.

Finance Minister Mario Marcel, central bank Governor Rosanna Costa, and other officials will meet investors in New York and Toronto next week as part of the annual Chile Day. Bonds denominated in local currency have become popular among Latin American issuers, including Uruguay, Peru, and Carlos Slim’s America Movil. Chile last tapped global bond markets in January, selling $1.7 billion in dollar notes due in 2029. The buyback offer expires at 10 a.m. in New York on May 30, with Citigroup Global Markets Inc., Itau BBA USA Securities, Inc., and Santander US Capital Markets LLC managing the deal.

Peso Depreciation Concerns

The Philippine central bank, Bangko Sentral ng Pilipinas (BSP), is actively managing speculation in the foreign-exchange market as the peso nears a record low. Governor Eli Remolona revealed that the BSP intervened modestly in the market on Tuesday. The peso fell by 0.4% to 58.29 per dollar on Thursday, approaching its record-low level of 59 reached in 2022. "In situations in which the peso depreciates, there’s a tendency for stress; the dealers, the traders, they tend to offer big amounts when they’re trying to sell the peso," Remolona said. "Sometimes the price fluctuates more than before, so we try to control that."

The peso has declined by 3.5% this quarter, making it the worst performer among emerging markets after the Argentine peso. Remolona also mentioned that the BSP is not intervening in the foreign-exchange market daily and that any intervention is "very modest." The central bank is considering cutting its key interest rate by as much as 50 basis points this year, with the first cut potentially occurring in the third quarter and another in the subsequent quarter, depending on the data.