Seeking Alpha
Currencies, macro
Profile| Send Message| ()  
Tuesday was an important day for Chile.
After two years of campaigning and making reforms, Chile was invited to join the OECD, becoming the first South American country to join and second behind Mexico in Latin America. Chile becomes the 31st member of the OECD.
Measures Chile adopted to pave the way for membership included reforming the management of Codelco, the state-owned copper company, increasing transparency in the banking sector and agreeing to international anti-bribery rules. It is more prestigious to join than substantive.
Chile's central bank also decided yesterday to leave rates on hold, as was widely expected. Rates have been on hold since July after having been slashed 775 bp in the January-July period. Rates will likely be on hold during the first half of 2010 and a normalization of monetary policy should begin in H2.
Deflationary forces are still evident, however. In fact, the November CPI, released earlier this month, made a new cyclical low of -2.3%. The magnitude of the decline caught the market by surprise, but a good part of the decline might be traced to a cut in administered prices. In November, the government cut the tariffs on electricity and the prices for electricity, gas and fuel fell 5%. Clothing fell 2.8%, which is the seventh monthly decline this year.
After leaving rates on hold, the central bank offered some important guidance. When it does begin raising rates, it indicated it would do so at a pace "comparable" with the survey of economists it conducted, which now expected the overnight rate target to be at 2.5% at the end of next year from 0.5% now. The previous survey put the 2010 year end target at 3.0%.
Chile is also in the middle of its presidential elections. Although President Bachelet enjoys widespread support (79% according to one recent poll), there is a one-term limit. Her coat tails appear short, however, as the center-right candidate, billionaire businessman Sebastian Pinera, easily beat her candidate, Eduardo Frei (44.05% to 29.6%). A run-off election, since Pinera failed to win a majority of votes, will be held on Jan. 17 and Pinera is regarded as the easy favorite. After a period of an expansion of social programs some consolidation and is likely under the new government.
Between early October and late November, the US dollar fell a little more than 13% against the Chilean peso. It has since been consolidating roughly between CLP490 and CLP507. The stronger than expected deflationary forces and scaled back interest rate expectations are offset by the general risk appetite and firm copper prices. Look for continued consolidative trading before an break lower for the U.S. dollar against the Chilean peso.
Disclosure: No positions
Source: Chile: Rates Are Steady, Outlook Is Strong