Given the Central Bank’s decision to cut the rate by 75 basis points—which is at the lower end of expectations— one would have expected the dollar to lose ground from the approximately 865 pesos at which it was trading prior to the decision.

Unfortunately for many, the reality was different, with the price reaching 890 pesos, and 900 just around the corner. Additionally, the rate hikes in the U.S. –which led to the dollar rising by nearly 3% against a basket of currencies over seven trading sessions—resulted in an even more pronounced narrowing of interest rate differentials.

As a result, local demand triggers stop-loss orders on short positions, which are fueling the rallies, with the CLP depreciating by more than 4% over the month (as it has so far this year), reaching highs last December. It is also important to note that the depreciation of the local currency reflects the sale of up to 8,000 MM USD through December (up to 2,000 MM USD per month) by the budget office, as announced at the end of last month.

Given the current situation, one wonders how far this rally might go. From a technical analysis perspective, we have resistance in the 895–900 range. It’s hard to imagine a significant breakout above this level, especially given that other comparable currencies have appreciated by 10% on average over the year, and have remained virtually unchanged this month. 

That said, the above analysis is based on current information, and given that we should be in the final stages of the rate-hiking cycle in the U.S., it is important to note that the current scenario reflects the worst-case conditions for the CLP, with a domestic interest rate expected to reach 8% by year-end—which is 150 basis points lower than the current level. In other words, it is very likely that the news is already priced in, so it is not out of the question to see levels closer to 850 for the remainder of the year.

Gustavo Gallardo, CMT

Assistant Manager of Sales & Trading at Fynsa