Why Chile is So Strong, While Copper Prices Slide

Copper prices are off almost 4.5% today, yet the Chilean peso has recovered from early weakness to trade at fresh 9-month highs. If it is not copper driving the Chilean peso, what is?

The most important consideration that has extended the peso's advancing streak to its fifth consecutive session is anticipation that the government will increase dollar sales starting next month. This is helped the peso be the best performing currency in recent sessions.

Last week, the Chilean government indicated it will sell $4 bln in $40 mln increments to repatriate international assets to fund the stimulus spending. This is to say Chile will convert some reserves for domestic use. Since March, the government has sold $3 bln in $50 mln chunks.

The dollar is trading near CLP531.50 presently after having been as high as almost CLP541 earlier. The next objective is near CLP526.

In terms of copper, the Chilean peso does not seem so tightly correlated, in any event. Over the past year, the Chilean peso and copper were correlated (at the level of percent change) 45.2%. That means that the Australian dollar, Norwegian krona, Brazilian reai and the Canadian dollar were more correlated against copper than the Chilean peso over the past year.

Over the past three months, the relationship between the peso and copper has broken down further. The correlation stands just above 28%. As mentioned in an earlier note, the Australian dollar's correlation with copper during this period was more than twice the peso's (63.6%) as was the Canadian dollar (63.9%). For those participants looking to hedge commodity exposure or take on (indirect) commodity exposure through the foreign exchange market, AUD and CAD are better then CLP for copper.