Peru and Chile: What happens to their currencies?

Where are the currencies of Chile and Peru? In this 2008 as moved in where the dollar, after hitting historic lows against the euro begins to recover, where the market turmoil affecting capital flows and where the governments of Peru and Chile have decided to participate in the foreign exchange markets to bring their coins to desired values ​​(or at least try), they do not seem to show a clear trend in the dollar. Analyzing the evolution of the Chilean peso and the Peruvian sol since late 2006, one can see that both Latin American currencies, except for an interim period, have observed a similar trend against the dollar, with a continuous appreciation since the beginning of the period in question, reversing the trend from April in Chile (product of the intervention of Banco Central de Chile) and since June in Peru (as a result of weaker economies in the eurozone). At the beginning of 2008 in Chile there was great concern with the strong appreciation of the Chilean peso had experienced in the first three months of 2008 was seen by more than 13%. With the daily intervention of the Central Bank of Chile in the foreign exchange market (where the monetary authority intervened buying U.S. $ 50 million per day) was achieved slowly reverse the trend and is so last Wednesday, the Chilean peso reached its minimum in the last 3 years.

Since the beginning of this month, the Central Bank of Chile decided to stop intervening in the currency market. In the case of Peru, the Peruvian government wants to avoid devaluing its currency to continue to avoid a negative impact on inflation. Rescued in a Reuters article, the following statements of cash an agent saying about it: "The Central Bank is demonstrating a bulletproof decision to keep the sun under control in order to mitigate its effect on inflation?. The evolution of the exchange rate is an issue which, for various reasons, concern for the governments of Chile and Peru. So imagine that the authorities will be taking place the following question: How will the exchange rate evolve in the coming months? Looking in both economies, both Chile and Peru, are keeping the same direction in monetary policy. The increase in inflation rates in both countries has caused the central banks of both countries decide to pursue a restrictive monetary policy by increasing its benchmark interest rate.

The annual variation in consumer price inflation rate in Peru is located in the 6.22% currently. The Reserve Bank of Peru has increased its benchmark interest rate six times. Currently it stands at 6.5%. In the case of Chile, retail inflation rate stands at 9.3% yoy, while after several increases, the benchmark interest rate now stands at 8.5%. Depending on the direction that monetary policies in both countries, one might think that this would generate pressure for currency appreciation. But there are other external factors that can greatly influence the future dynamics of the currencies of Chile and Peru. The volatility of international financial markets has created an impact in the financial markets of Chile and Peru, though given the isolation that have the same, it is not of great magnitude. However, the uncertainty has meant that there is greater demand for dollars and a lower supply in both markets, which pushes both the Chilean peso and the Peruvian sol weakened against the greenback.

What can happen with the bailout plan in the U.S., is a most significant event since it will influence the dynamics of the dollar. One operator interviewed by Reuters said about the Chilean economy: "In any case, do not know what affect the local rate if the plan is approved and will surely strengthen the dollar against other major currencies, and that could also replicate in currencies in the region, of course if they refuse, it is more likely that the weight falls hard?. For a good proportion of market analysts, the evolution of the U.S. economy show a slowdown in the decline between the last quarter of 2008 and the first of 2009, and from there begin his recovery (although the pace is likely to be slow) . Given the almost inevitable march of European economies into recession, the U.S. dollar has a positive outlook for further strengthened against the euro. If this is so, probably the dollar will strengthen against Latin American currencies. Chile may allow this to happen, but as I mentioned in a previous paragraph, is not the desire of Alan García that the new Peruvian sol further weakening the inflationary consequences that entails.

But if you think that then the Reserve Bank of Peru will maintain active involvement in the Peruvian currency, there are doubts about the ability of the monetary authority to do so. An operator told Reuters consulted in relation to it: "Agents are asked at the beginning of the day how much longer could keep the dollar sales policy of the issuing entity to a global trend of sharp appreciation of the dollar?. Of course there is full agreement among market analysts about the evolution of the U.S. economy. In a report published on 22 September by the Scotiabank Peru "Given the deterioration in the finances of the United States that is deducted from the new measures, is likely a weaker dollar on a sustained basis sometime in the future." Moreover, the potential impact of the crisis may have on the world economy has relevance to both economies also in relation to international prices of commodities and through them, on the exchange rate. As you can see, there multiple factors difficult to predict behavior in the current context and that pressure on the currencies of Chile and Peru in one direction or another.

Beyond this scenario appears uncertain, I understand what you can do is imagine tolerance levels of both governments about the behavior of the exchange rate. For example, in the case of Chile, market forces push the Chilean peso to appreciate (in a similar magnitude to that observed at the beginning of 2008), probably the Central Bank of Chile intervene avoiding that appreciation will continue beyond this limit. Now, assuming that the Chilean peso depreciate, one can hardly think that the Central Bank of Chile decided not to intervene and that inflationary pressures would be increased. In the case of the Reserve Bank of Peru, are not willing to tolerate the Peruvian currency to depreciate further and right now is intervening. The monetary authority of Peru has international reserves of U.S. $ 34,500, so it has the capacity to remain engaged. As a final thought, it is likely that both the Chilean peso and the Peruvian nuevo sol against the dollar evolve within a limited range of variation and that beyond the different factors that put pressure on them, is the decision of the governing bodies of monetary policy to keep their prices controlled to avoid adverse effects on the economy. We will meet again next Monday, Horacio Pozzo