This year, the performance of the local TC has left no one indifferent. After hitting highs of around 1,060 a year ago, we’ve seen how the decline in political risk and a broad-based drop in the dollar across global markets drove the exchange rate to levels near 800 for much of the first half of the year. 

The recent rate adjustment in Chile—coupled with the rate hike in the U.S.—has accounted for much of the rise seen in recent weeks to the 850 level. That said, it seems fair to ask whether this upward trend in the dollar will continue or whether these are levels at which to exit long positions or perhaps bet on declines. To answer this, it is important to analyze the situation from two perspectives: domestic and international. 

In this context, we see that the decline in local interest rates—which are expected to stand at around 8% by year-end, down from the current 10.25%—would be justified by inflation stabilizing and reaching an annual rate of 4.0–4.2% by year-end. If we consider the above, and given that copper prices are still hovering around 4.0—albeit barely—we should see outflows of dollars. Assuming this scenario holds true, we should see an exchange rate closer to 800, and perhaps even lower levels. 

The counterpoint is likely the speed at which the spread on the aforementioned rates could narrow. If we look back a bit, when the Central Bank of Chile raised the rate to around 10% last year, the dollar remained strong. In that scenario, the reasons for the rate hike were negative. Given this, the important thing is that it’s not enough to look at the rate hike on its own; one must also consider the reasons behind it.

In addition, if we compare the local currency with its Latin American counterparts, we see that so far this year, the Chilean peso has shown virtually no change, compared to a 10% appreciation in the others. This reinforces the idea that the depreciation of the Chilean peso from 800 pesos is the initial impact following the interest rate hike announcement mentioned above. 

That said, from a technical standpoint, a pullback to 830–820 shouldn’t come as a surprise, as long as 850 remains above that level. On the other hand, if prices hold above this level—which served as a key support zone for much of last year—we could move toward the 900 range. This would likely be accompanied by developments that are not currently on the radar, such as inflation failing to converge as expected, or the Fed raising rates indiscriminately. This last point becomes more challenging in a market that views current interest rate levels as terminal, with analysts arguing that, beyond a certain point, further increases have only marginal effects on inflation.

Gustavo Gallardo Casal, CMT

Assistant Manager of Sales & Trading