Since the beginning of the financial crisis, many less known currencies have been making headlines. Icelandic Krona became a poster child of the global turmoil, with many analysts claiming it was the proverbial straw that broke the camel's back and pushed financial markets over the edge. Iceland once prominent banking industry was destroyed, together with depositors from many countries.
Most currencies, primarily in emerging economies, but not only, lost as much as 50% of value in relation to the US Dollar. As money was seeking safety, Polish Zloty, Swedish Krona, Brazilian Real and scores of other currencies fell precipitously. Even Australian Dollar and New Zealand Dollar were punished. In the most extreme cases, like Zimbabwe, local currency virtually seized to exist.
Largely overlooked by most analysts and the press was Chilean Peso (CLP). Peso was no exception last summer, following global trends. At the apex of the crisis it lost just above 50% of its value to USD, as measured from the yearly high. This brought an end to a long bull market, which CLP had enjoyed since late 2002.
Fortunes have changed for the Peso since beginning of 2008. While volatility, expressed by daily and weekly price ranges, remains in high historical ranges, CLP has appreciated 20% as compared to a dollar. This is a little more than currencies from other countries deemed as developing, with prospects for the most immediate future also bright.
Peso is not pegged to USD, but its central bank has been following moves of FED, resulting in close resemblance of financial markets performance between the two countries. For starters, in order to stimulate credit markets, benchmark rates have been cut by 7.75% this year. In this respect Chile is a leader among Latin American countries, with the region lowest rates at 0.50% and an all time record level for the country.
While this low rates is a positive sign for the economy, as reflected by recent stock market performance, it could put some pressure on the Peso. Bank dealers have been reporting increase in the demand for dollars as some banks and investors move money to Brazil to benefit from the interest rates differential. The carry trade between CLP and BRL. However, it is not expected to be a major trend because more money is flowing into Chilean equities from abroad.
Main stock indices gained about 25% this year, with the Chile 65 electronic trading benchmark jumping 30%. Being an important producer of raw materials like copper, steel and lithium, Chile stands to benefit even more with any sign of world recovery. This should support CLP, as foreign investors continue to seek above average returns on country stock exchanges. Furthermore, central bank is expected to start raising rates again soon, making any carry trade less appealing.
Chilean Peso is not a mainstream currency. Most Forex brokers don't offer it and it has to be traded through banks. Also, the spreads are elevated, by currency trading standard, making it rather unsuitable for active trading. That said, anybody who likes exotics or seeks exposure to Latin America, should give CLP second look. Longer term it is appealing currency, especially if compared to others in the region.
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