While a few weeks ago we saw that the the dollar near 1000 was unusually high, seeing it at 930 levels -after being at 890 a couple of weeks ago- leaves the same feeling, but in a different environment: Copper at 4.4 after touching 5.0, and a rate in Chile at 5.75%, with inflation data that should at least slow down the pace of cuts, as economists' expectations show. With all this, one should expect the dollar to return to levels closer to 820.

Why these levels? Last year, before the Central Bank of Chile started to lower the policy rate (from 11.5% levels), the dollar in Chile traded during the first half of the year between 785 and 820 approx. The rise is explained by a Dovish Central Bank of Chile, with the FED keeping the rate between 5.25 and 5.5. This decrease in the spread generated dollar buying flows that lifted it by almost 180 pesos.

With copper settling strongly above 4.0 and reaching close to 5.0, the selling flows were not long in coming, and caused the dollar to reach levels below 900. However, the recovery of the last few days is explained by copper returning below 4.5 and a new Carry Trade with Brazil, which keeps it away from the previous levels of the downward rate cycle.

With the spread between the FED and the local rate already narrowed, it is to be expected that the sale flows will reappear with a FED materializing rate cuts (with the futures market expecting one in September and another in December). This, added to the fact that next year we are entering an election year; and the market is anticipating what should be a change of government for one with more pro-market policies, causing USD flows to return to Chile after almost 5 years of outflows. With this, we should see levels of a year ago, something that has been very difficult.

Gustavo Gallardo Casal, CMT
Sales & Trading Assistant Manager