The correlation and behavior between the price of different assets and economic variables is a topic of great interest. One of the most studied links in Chilean financial markets is the correlation between the local exchange rate and the price of copper. correlation between the local exchange rate and the price of copper. This relationship is not only of great relevance for investors, but also for the Chilean economy.

Copper is a precious metal with wide industrial applications ranging from construction to electronics, and even in the emerging and growing manufacture of electric cars, which is copper-intensive. In this sense, Chile is positioned as the world's leading copper producer, with a significant share of the global copper market. According to Cochilco data, Chilean copper production represented 25.9% of world production in 2023, with a production that reached 5.25 million tons.

The relationship between the price of copper and the USD/CLP is complex and is influenced by several factors, but the main one responds to the importance and weight that this metal has within the fiscal coffers and the flow of dollars at the national level. importance and weighting that this metal has within the fiscal coffers and the flow of dollars at the national level.

Since the exchange currency for copper is the dollar, the higher the price of copper, the more dollars enter the country, increasing the supply or quantity of this currency in the local economy, which causes its price to fall. On the contrary, the lower the price of copper, the less dollars enter the country in a given period of time, The lower the price of copper, the lower the amount of dollars entering the country in a given period of time, which reduces the amount of dollars entering the fiscal coffers, causing the exchange rate to rise.

Thus, when the copper price moves in one direction, the USD/CLP price moves in the opposite direction, which is known as inverse correlation.

This correlation, which has historically been consistent, has been fading in recent months, and although the price of copper has been rising for months, this has not had a significant impact on the local exchange rate. This, The exchange rate movements have been responding more to the market's expectations of rate movements by the U.S. central bank.

Persistent inflation and copper rally: Where is the dollar headed?

The persistence of inflation at a global level generated market expectations that the US Federal Reserve will slow down the pace of rate cuts. This implies that in the U.S. the issuing entity, which has not yet initiated rate cuts in this monetary cycle, may not even cut its benchmark rate so far this year.

However, the historical correlation between the price of copper and the local quotation of the dollar has regained strength, and together with an important copper rally, the local exchange rate has shown an important appreciation. During the first 21 days of May, the price of copper had appreciated by 12.4%, plunging the exchange rate by -7.6%, which went from trading at levels of $960 at the end of April to levels of $888.

With this in mind, the market is divided: Where is the dollar headed? Will we continue to see a falling exchange rate on the back of the copper rally? The correlation between the two variables has historically proven to be strong. Long-term structural demand for this metal could increase significantly in the coming years as a result of major electrical developments, such as electromobility. At the same time, large mining companies are still not making large investments to increase their production capacity and supply, increasing the chances that we will see a mismatch between copper supply and demand in a few years, generating further increases in the price of the metal.

Or, will we see anWill we see a rising exchange rate in the face of more persistent inflation in the US? The greater persistence of inflation in the US, as has been the trend, will cause the Fed to continue postponing its decision to cut interest rates, increasing the rate differentials between the US and Chile, which would push up the local exchange rate.

We will see in the coming months what happens....

José Pablo González
Portfolio Manager Private Debt