Chile’s peso posted its biggest monthly drop since Lehman Brothers Holdings Inc. collapsed as a slump in copper dimmed trade prospects for the metal’s biggest producer. The peso sank 1.3% to 519.75 per US dollar on Friday.
The peso’s 11% slump in September, the biggest since October 2008, trails the 24% fall in the price of copper as commodities entered a bear market on concern global growth is slowing. Copper accounts for more than half of Chile’s exports.
“The peso could fall further as the threat of a breakup of the euro-zone moves copper lower, or if the central bank cuts interest rates on lower growth,” Leonardo Suarez, chief economist at Larrain Vial SA, said Friday in an interview in Santiago. “All the variables point to depreciation.”
The Chilean central bank has kept its key interest rate unchanged at 5.25% for the past three months after raising rates at five straight meetings.
Interest-rate expectations have declined this week after central bank officials said they were prepared to act “aggressively” to fend off an external crisis. Central bank policy maker Rodrigo Vergara said the bank has “the tools, the will and the space to act.”
His comments were echoed Thursday by bank President Jose De Gregorio, who said policy makers’ base case scenario that rates would remain unchanged shouldn’t be interpreted as a commitment and that the bank was prepared to change rates at any time.
The peso’s decline in the third quarter is 10%, outpaced by a 15% decline in the Mexican peso and a 16% fall by the Brazilian real. The peso fell less than other regional currencies earlier this quarter as local pension funds repatriated assets from abroad, buoying the currency.
Chilean pension funds cut their dollar hedges by almost 9 billion to 15.5 billion dollars by the end of August from 24.4 billion at the end of May, central bank data shows.
Copper for December delivery fell 5.95 cents, or 1.8%, to 3.1865 dollars a pound on the Comex in New York. The metal for delivery in three months dropped 1.9% on the London Metal Exchange.
The extra yield, or spread investors demand to buy Chile’s 3.875% bonds due in 2020 instead of US Treasuries increased 76 basis points to 158 basis points from 82 basis points during the third quarter, according to Bloomberg prices.