Chile central bank to intervene in currency market after peso slump

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

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

On Thursday, the peso hit a record low of 1,045.80 to the
dollar, dropping 3.7% on the day. The bank said it decided to
intervene due to the U.S. dollar’s strong global advance since
June, the drop in the price of copper, Chile’s main export, and
“local uncertainty.”

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

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

“However, there are limits to what the central bank can
achieve given the very challenging domestic and external context
and when taking into account the limited amount of foreign
exchange reserves.”

Chile relies on copper exports to boost its economy, but the
metal’s price has tanked, hurt by fears of a global recession
and lowered demand, particularly from China. Meanwhile,
assumptions of an aggressive rate hike by the U.S. Federal
Reserve later this month have propelled the dollar to recent
highs.

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

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

Casarin said that “$25 billion in a country like Chile where
GDP is not very big is remarkable. There’s no doubt that (the
peso) is going to be an outperformer in the aftermath.”

EXCEPTIONAL MEASURES

The bank announced a $10 billion sales program on the spot
market from July 18 to Sept. 30 and the sale of foreign exchange
hedging instruments for the same amount.

Additionally, to increase the provision of liquidity in
dollars, it will offer a currency swap plan for up to $5
billion, complemented by a liquidity program in pesos.

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

Hours later, the bank published an initial operations
calendar, which next week includes $500 million in forward sales
and $200 million in spot sales a day along with two swap sales
totaling $600 million.

Earlier in the week, the bank had said that the
deterioration of the local currency had not significantly
affected the financial system, although it said it would
continue to assess the situation in order to act if necessary.
(Reporting by Fabian Cambero; Additional reporting by Devik
Jain; Writing by Alexander Villegas and Kylie Madry; Editing by
Jonathan Oatis and Rosalba O’Brien)