Peso Drops from 8-Week High

Chile’s major currency Peso has seen a decline from the 8-week high price mainly, because of the fall in copper prices. The chairman of Federal Reserve, Ben S. Bernanke has also showed his concerns by publicly speaking of the ongoing struggle in US to resolve difference between Republicans and Democrats over the Government deficit reduction issue. US, incidentally, is the second biggest consumer of Copper in the world and copper is the biggest export of Chile. Hence, any economic news that brings negative sentiments among investors on US economy is going to affect Chile badly as well.

From yesterday’s high of 474.34 per USD (It marks Peso’s strongest level since 18th October); the Peso has declined by around 0.2% and is currently at 475.10 per USD. Copper for delivery in March also plummeted by 1.7% and is priced at $3.653 a Pound.

Cristian Donoso, who works as a currency trader for Banchile Corredores de Bolsa stated that the market is uncertain, confused and concerned for the future of the Chilean economy. However, he added that Chilean Peso has several reasons to strengthen further and falls in Copper alone won’t be able to hold back that. He commented that Peso would have seen huge depreciation if it was entirely dependent on Copper as the metal prices is falling randomly. However, in reality, that hasn’t happened.

According to analysts, the Central Bank of Chile is going to keep the target lending rate at 5% for 11 months consecutively. Incidentally, this small Latin American country has the 2nd highest (Chile is only after Brazil) borrowing costs in countries of the entire continent. The benchmark lending rate of Brazil was cut to a record low 7.25% from that of 12.5% last year. The international investors have bet $6.5 billion against Peso and this is the lowest value since 4th May.

In US, President Obama and the House Speaker John Boehner are yet to come into an agreement to avoid the automatic spending cuts and tax increases, which are scheduled to take effect in early next year. Federal Reserve has already decided to purchase bonds worth $45 billion every month in addition to their existing asset purchase programs. However, chairman Bernanke has warned that this additional bond buying will not be able to offset the effects of the so called fiscal cliff, if that at all takes place.