Foreign Currency

Copper price rally resuscitates world’s worst-performing currency in the first quarter


A quick look at Chile’s terms of trade indicate the peso’s rally may have further to run. Copper, which accounts for just over half of the nation’s exports, is up about 20% since Feb. 9, while the peso has gained a mere 2.2%. Oil, of which Chile imports almost all its needs, has gained 6.9% in the same period.

“CLP should not be at such a wide gap to COP or MXN at the current stage of their macro story and terms of trade improvement,” said Brad Bechtel, global head of foreign exchange at Jefferies in New York. “If the G10 central banks start easing and commodity currencies and pro-cyclical currencies start gaining, then CLP will have an outsized move.”

Copper has gained on a recovery in global manufacturing and the prospect of tightening mine supplies. Chile produces a quarter of the world’s entire output of the red metal, a key component of the global energy transition away from fossil fuels.

The Peruvian sol is also benefiting from the metal’s rally, with the currency the third best performing major in the world this year. Still, much of that is due to the central bank, which has intervened to prop up the sol when it has dropped sharply.

Being long Peruvian sol and Chilean peso is not for the faint of heart, though. Chile has spearheaded interest rate cuts across Latin America in the past 12 months, while constantly shifting the pace of easing, stoking volatility in the peso. The sol was heading down a similar path until the central bank stepped in.

The peso still has the second highest implied volatility in the world, lower only than the Russian ruble.

Also, reduced trading volumes make it expensive and risky to jump in and out of large positions. At a time when even profitable carry currencies such as the Mexican peso and the Polish zloty are suffering, investing in Peru and Chile looks risky, whatever copper is doing.

(By Davison Santana and Vinícius Andrade)





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