If one looks at the exchange rate level in a historical perspective, there is no doubt that the current figures are particularly high. After the pandemic, and the inflation that came as a consequence -which resulted in higher rates generating an appreciation of the dollar in the world-, today we are on the verge of the beginning of the so-called normalization of FED rates in the United States, which the market is betting should fall from the current 5.5% to around 3%. This should imply a weaker dollar in the world. 

On the other hand, the political factor has been significantly impacting the exchange rate in Chile. At the end of 2019 there was a social outburst that resulted in not one, but two attempts to change the Constitution. This Wednesday, in fact, marked two years since the rejection of the first attempt; recognized by many as the most important vote of our time.

While it is true that constitutional change is not a priority for the population, the fears that generated capital flight as of 2019 have not returned. With investment that has remained depressed, it seems that the market is waiting for clarity on the imprint of the next government to generate investment projects.

But it is not only in Chile that elections are close; in the US a new president will be elected in November, between Donald Trump and the current vice-president Kamala Harris, which also applies volatility with the impact of foreign policy, which -in terms of exchange- could impact on copper, which today is installed above 4.0, well above the historical average.

It is striking that several analysts expect higher inflation if the former president leaves, when if anything is clear, it is that oil production and refining (or Black Gold, as he called it in a recent interview) will return. This should bring some respite for an economy that has seen an increase of almost double in fuel prices in the last 4 years, and lead to lower inflationary pressures.

A fourth important factor to consider is geopolitics, with two active conflicts: the Middle East and Russia and Ukraine. From a global perspective, it has put no small amount of volatility into the markets and with non-escalation efforts that have so far been successful.

If we summarize the above, we can say that, at least in Chile, the dollar is at historically high levels and that with the main factors that have explained its rise already discounted, it only remains to wait how the variables explained above are resolved.

If everything works out as expected, we should have a lower exchange rate in Chile; otherwise, we will be in a new normal where we will have to get used to higher exchange rates.

Gustavo Gallardo, CMT

Sales and Trading Assistant Manager

Fynsa Money Desk