Chile’s central bank to intervene in currency market after peso falls

SANTIAGO, July 15 (Reuters) – Chile’s central bank announced a $25 billion foreign exchange intervention to support the peso after it fell to a record high, giving the currency a boost Friday.

In a statement late Thursday, the bank said the peso had depreciated with unusually high intensity and volatility over the past few days.

On Thursday, the peso hit a record low of 1,045.80 to the dollar, losing 3.7% on the day. The bank said it decided to intervene due to the sharp rise in the US dollar since June, the fall in the price of copper, Chile’s main export, and “local uncertainty”.

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The announcement boosted the peso, which closed with a 7.8% gain on Friday afternoon.

“This is a welcome development, especially if combined with a decisive conventional monetary policy strategy,” said Alberto Ramos, economist at Goldman Sachs.

“However, there are limits to what the central bank can achieve given the very difficult internal and external environment and given the limited amount of foreign exchange reserves.”

Chile relies on copper exports to boost its economy, but the price of the metal has fallen, hurt by fears of a global recession and falling demand, particularly from China. Meanwhile, speculation of an aggressive rate hike by the US Federal Reserve later this month has propelled the dollar to recent highs.

Brokerage Banchile Inversiones said the intervention would only partially alleviate pressures on the Chilean peso as “unfavorable factors persist”.

Friday’s peso rally was to be expected, said Marcos Casarin, chief economist for Latin America at Oxford Economics in Mexico.

Casarin said that “25 billion dollars in a country like Chile where the GDP is not very important, it is remarkable. There is no doubt that (the peso) is going to perform better in stride.”

EXCEPTIONAL MEASURES

The bank announced a program to sell $10 billion in the spot market from July 18 to September 30 and the sale of currency hedging instruments for the same amount.

Additionally, to increase the supply of dollar liquidity, it will propose a currency swap plan of up to $5 billion, complemented by a peso liquidity program.

“These exceptional measures are consistent with the monetary policy framework, based on an inflation target and exchange rate flexibility,” the statement said.

Hours later, the bank released an initial trading schedule, which next week includes $500 million in forward sales and $200 million in spot sales per day, as well as two swap sales totaling $600 million. of dollars.

Earlier in the week, the bank said the deterioration in the local currency had not materially affected the financial system, although it said it would continue to assess the situation in order to act if necessary. .

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Reporting by Fabian Cambero; Additional reporting by Devik Jain; Written by Alexander Villegas and Kylie Madry; Editing by Jonathan Oatis and Rosalba O’Brien

Our standards: The Thomson Reuters Trust Principles.

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