(Bloomberg) -- Chile’s central bank will offer $4 billion of currency swaps after the peso weakened 6% in three days amid a wave of social unrest and investor concern about a new constitution.
The currency fell to a record low against the dollar this week, triggering a verbal intervention from the central bank on Tuesday. At the same time, the implied volatility in the peso spiked to the highest levels since 2006. The measures announced today will come into affect Thursday and continue until Jan. 9, the bank said in an e-mailed statement.
“I wouldn’t take this as something that will turn the market around,” said Alejandro Cuadrado, a currency strategist at BBVA (MC:BBVA) SA in New York. “It will accommodate any liquidity squeeze, but it’s not fighting the depreciation. I don’t think it’s a game-changer.”
Chile has been wracked by a wave of protests and riots since Oct. 18. The peso only edged lower at first before collapsing this week after the government on Sunday backed plans to rewrite the constitution, spooking traders concerned about extended uncertainty. President Sebastian Pinera in a speech to the nation last night failed to announce new measures or reassure the market.
“What it’s doing with the swaps is to increase the availability of foreign currency,” said Nathan Pincheira, an economist at Fynsa SA in Chile. “Whoever asks for the dollars will have to return them. It’s trying to relieve the short-term drought.”
The peso declined Wednesday after the government said yesterday that it would pull $1 billion from its sovereign wealth fund in the next few days and another $1.4 billion in early 2020. That money will end up being exchanged into pesos.
The swaps will provide liquidity in dollars without draining central bank reserves, since they will have to be repaid. Brazil’s central bank uses a similar system of swaps, which it either rolls over or allows to mature.
The central bank intervened in 2008 and 2011 to prevent the peso from strengthening, both times through programs of dollar buying. More recently in 2017, Mexico’s central bank offered a program of currency forwards to help prop up its peso.
On this occasion, strengthening the peso may counteract the bank’s monetary policy, which has an easing bias. On the other hand, a weaker peso tends to push prices higher.
(Adds analyst comment in the fourth paragraph)
