The Very Weak Peso

Chile Headlines & Hot Topics
1

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

  1. 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.

2

You got it, inflation and politics.

Began falling when the polls showed Jadue in the lead and now Boric; the embarrassment of the far left CC circus; the Pandora Papers and Piñera’s name involved; BoA and other financial institutions eliminating Chile as investment grade; inflation (devaluation) due to IFE/AFP/other bonos for the COVID emergency and populist vote getting; and yeah supply chain problems. Ha!, there are a hell of a lot of ships waiting offshore here in San Antonio, the last time I saw this many was after 27F megaquake. Vendors on the ML WhatsApp group for the past months have been complaining about skyrocketing container costs, air transport costs, time to get things delivered. Better shop early for Xmas to make sure you get exactly what you want in the size, color, etc. that you want without the usual discounts and deals of the past.

3

if it’s any consolation, it appears to be doing well historically compared to other Latin American countries over a 30 year span Historical comparison graph for currency exchange rates since 1953

4

Some better news for the economy - The rejection to the 4th withdrawal strengthens the peso

5

900 pesos to the dollar, for the first time ever yesterday.
Today up to an all time peak of 912, now 910 at time of writing.

As often was the case before, copper price seems to be at fault
Low copper price = weak peso

Weak global economy means less raw materials for building hence low copper price
See opinion from Ricardo Bustamane , jefe de estudios trading de Capitaria in below article

This will be bad news for the price of fossil fuels and other imported goods, perhaps further slight rises to come.

It’s good news for only a few such as tourism industry and businesses that operate here but mostly export.

It’s not good news for the Boric administration since the government often unfairly takes the blame for an economy outside of their control. This may weaken his position and limit his ability to do major reforms.

This may be mostly be beyond his control but he needs to make some speech or do something to connect with the people, as well as offer something. Better some grand gesture now that has public support and is shown to have public support rather than have to concede a point later following strikes or riots after which you become weakened. Time to be proactive.

I think a modest public sector pay rise, plus some artificial price controls on some basic foods is called for - I’m not normally a fan of the latter (sounds a bit too communist for my liking?) but this is a special case surely. Some quick sudden action to tax the rich may also be needed. Perhaps speed up the minimum wage increases a bit…but only if economists can agree it won’t make inflation even worse…and be counter productive…

1 Like
6

I get paid in US$, so I’m not complaining.

1 Like
7

What tourist industry?

And in Santiago:

-¿Los hoteles permanecen cerrados?

-Está abierta solo La Terraza. Los hoteles cerrados, porque las condiciones para abrir no se dan. Es un conjunto de cosas, las calles están arruinadas, las estatuas pintadas, todo arruinado. Y todavía no se ve que se esté recuperando nada. No nos queda otra que aguantar.

2 Likes
8

Tourism industry OUTSIDE of Santiasco city proper.

Lots of inquiries about the north and Atacama and the south from those planning for the summer and people interested in the various less known national parks, the wine valley luxury hotels, Cajon del Maipo, etc.

1 Like
9

For international tourism, Santiago is the first and last destination on a trip. So what goes on there is a good indication of the state of the trade.

If you are referring to internal tourism; given the uncertain financial and political future, Chileans may not feel secure enough to splash out on what after all is a luxury item. Time will tell.

1 Like
10

Only reporting what I see on TA English Chile forum which the locals do not read or participate.

1 Like
11

There´s so much uncertainty at the moment about how the summer season will turn out. I heard anecdotally that last summer was a good one for domestic tourism because of restrictions of travelling abroad.

You might get a sudden boom this summer from people that have saved up and not travelled for a few years.

Or maybe not, since a lot of people just went on holidays anyway covid be damned.

I probably wouldn´t travel around in February without any reservations.

1 Like
12

Last summer, or rather last February, was the busiest month we have ever seen. Most visitors didn’t bother reserving, they just turned up to a town, indeed the whole Elqui Province, that was already saturated with visitors, and many had to go elsewhere.

All Chileans, zero foreign visitors.

So again, who knows ?

1 Like
13

Last February the entry requirements were still quite onerous compared to now.

14

939 pesos to dollar today briefly, another all time record. Back to 916 at end of today.

15

Our company’s clients are all overseas so…meh.

16

All very funny when the economics minster says on national media that it doesn’t matter as Chileans use CLP.

I still remember the idiotic comments on social media of the “dream team” in economics that the Boric admin ushered in…

17

A classic from the Economy Minister! What an idiot.

18

Oh its a dream team alright…a bad dream.

The CLP weakness doesnt matter cause chileans only use CLP. The implication is chileans best not leave chile where they will face reality. Enjoy your CLP padded cell. I recommend the blue and orange ones…more cushy for when banging head on wall of cell. Its sad that people in chiles current government think this is a reasonable answer to CLP inflation. Next brilliant idea will be yet another mandated inflation of the minimum wage. Cause doing that the past 3 times really stemmed the tide of inflation.(sarcastic)

Reminds me of what the us president said about inflation in the US when saying inflation is worse in EVERY other country of the world than the US. Even the lame lefty pundits were like “uhh…dats not true”.
Certainly different factors to some extent causing various levels of inflation in different countries.

19

But the exchange rate does affect the cost of imported goods since these contracts tend to be in US$. A weaker pesos means imports are more expensive. It’s good for exports, because they become cheaper.

https://www.pauta.cl/economia/alza-del-dolar-en-la-vida-de-las-personas-alza-historica-como-afecta

1 Like
20

Yes, the price of all standard world commodity imports are paid in USD (unless you participate in BRICS) - oil, gasoline, natural gas, LNG, coal, steel, aluminum, fertilizer, etc. Also, all those China goods as Chile manufactures or value adds little come in by container (another source of skyrocketing costs) or air freight and what do those Alibaba accounts settle in - USD.

Don’t know what the number is but the genius at Hacienda just blew a significant portion of Chile’s USD reserves trying to game a slowdown on the record peso loss and then being overrun by the market which is a bad sign of much worse situations to come.

1 Like