In our last column, we saw the dollar settling below 950 pesos, and we expected that as uncertainty fell, we would also see the exchange rate fall. As the weeks have passed, we have witnessed a completely different reality, but for other reasons.

The explanation comes, on the one hand, from the rate differential, where the drop in local rates as a result of a more benign inflation has compressed the spread with the Fed rate. On the other hand, the rise in copper prices due to the supposed tariffs to be imposed by the United States left the market without considering this rise, underweighting the fact that we are still at levels above 4.5 dollars per pound. A third factor is the risk, although minor, of the left-wing candidate being elected, being a Communist Party militant.

All of the above keeps the local currency close to 1,000 pesos per dollar. At this point, the explanations as to why it is at relatively high levels serve as a starting point for -to some extent- projecting an exchange rate for the coming months.

In the case of rates, although it is true that the Central Bank of Chile is ahead of the Fed, in its last decision, two Fed presidents stated that they preferred to lower the rate. With this, and internalizing what may occur in subsequent meetings, we should see a widening of the spread, which should lead to greater flows of local sales.

Secondly, by announcing the exemption of refined copper products from the tariffs to be applied by Washington, the market adjusts. This will clean up the tariff effect and we will probably see again that current copper levels are clearly high.

Third, from both polls and betting sites, we should see a shift towards a more pro-market government in the year-end presidential elections. In the coming months, we should see a market anticipating (as in the stock markets) attractive policies. This should be the prelude to a reversal of Chile's deteriorating fiscal position and regulatory changes that promote investment. However, we should never rule out a tail event, such as the election of the ruling party candidate, a Communist Party militant, as unlikely as it may seem today.

In summary, the current high levels of the dollar are explained by reasons that, in a not too distant horizon, could be reversed and finally see a break of the 900 level, key support to think about 750 pesos in the longer term, as we stated in the previous column.

Gustavo Gallardo, CMT
Fynsa Money Desk Trading Manager