Peso Close to All Time Weakness
So we are now seeing a very weak peso.
Currently, the peso is its weakest all time against the Euro (about 950 at the time of writing).
It is second weakest ever against the $, being in the 820s (we had 860s/870s a year and a half ago).
It is second weakest ever against the UK £ (1130s now, we had about 1200 in 2003/2004).
https://fxtop.com gives you the long term view and you can you decades back and it was never this weak.
Copper Not to Blame for Once
In all the years I’ve lived in Chile (since 2014) I’ve seen a close relationship between the peso and the copper price, but not this time. The copper price this year has been as high as it’s ever been and yet the peso has, against the trend of recent years, weakened in spite of copper price rise.
I’ve just carefully studied the copper price on https://www.nasdaq.com/market-activity/commodities/hg:cmx and compared it to USD-CLP exchange rate on US Dollar to Chilean Peso Exchange Rate Chart | Xe
On a day to day and week to week basis, the copper price seems to hold to its usual trend. When the copper price goes up, the Chilean peso strengthens (i.e. less pesos to the dollar) and when the copper prices goes down, the Chilean peso weakens (i.e. more pesos to the dollar).
However when you zoom out and look at the broader trend across a number of months and for the whole of 2021, it’s a different story. Unusually, we have a high copper price and a weak peso simultaneously.
From April/May 2021 to October 2021, the copper price has been stable. And yet the peso has gone from 700-720 to 820s, about a 15% weakening. The weakening happened in spite of good progress on COVID in the same period.
Let me know if you see any good analysis of why this is happening. I haven’t found one, so I can only use my own ideas.
Possible reasons - fiscal environment, supply chain and politics
- AFP withdrawals/IFE - reduced fiscal prudence. The more money you print, the less it’s worth.
2 We are seeing global supply chain difficulties. Because Chile is a smallish country well away from major supply routes, and with a heavy reliance on imports rather than internal production, it may be suffering.
3 Markets belatedly waking up to the trend to left wing politics.
4 Uncertainty due to constitution and political environment.
I am Agnostic on Economic Growth
By the way, I am not saying that the weakening peso is a bad thing. The markets don’t measure everything and if the markets have worked out that a just government is likely to take over and try to reduce poverty and homelessness and inequality then markets might suffer as (debatably) a better world is created.
Further, a weakened economy means less environmental destruction and pollutions which may be beneficial for future (and even current) generations.
So clearly many will do badly out of this, and some will do well, but overall I’m open minded about whether it is a good or a bad thing. I think to understand that we first need to think more about the causes of this and where it goes from here.