Chilean Peso Trading: What To Know

Chile is one of the Latin American (LATAM) countries with an interesting political history, but this hasn’t stopped it from being one of the rising economies in the region. Chile seems to stand out from the rest of the LATAM economies, although its monetary history has also been volatile in the past. Trading the Chilean peso (CLP) against major currencies such as the US dollar is not unusual for traders who add LATAM currencies to their trading portfolios.

We will share with you some interesting insights regarding the Chilean peso and the Chilean economy that could help you shape an opinion and decide if you’d like to include the currency in your trading strategies.

The Chilean Peso and the Who is Who of the Chilean Economy 

Chile is one of the economic leaders in the LATAM region. It should be noted that Chile is the largest copper producer in the world and a significant contributor to global lithium production, ranking as the second-largest producer.

The World Bank says that “Chile has a recognized track record in development, with strong economic dynamism in recent decades. However, growth has been slowing down, stagnating productivity and progress in equity. Inflation could remain high in the short term given some inertia but is projected to converge to target by end-2024 amid a negative output gap and receding cost pressures.”

According to the International Monetary Fund (IMF), “the Chilean economy is approaching the end of its adjustment cycle towards more sustainable growth and lower inflation in a challenging external environment. The authorities are implementing very strong policies to preserve macroeconomic stability and rebuild buffers. The government has reform ambitions to raise tax revenues, reduce inequality, reform pensions and health care, as well as foster a green economy.”

The Organisation for Economic Cooperation and Development (OECD) analysts noted in a report regarding the Chilean economy that “the central government deficit will be 2.0% of GDP in 2023 and 2.1% of GDP in 2024, which will not threaten debt sustainability. The central bank has continued to tighten policy to curb inflation and control inflation expectations, taking the policy rate to 11.25% and vowing to keep it at that level until there is clear convergence of inflation towards target.”

They also added that “real GDP will contract by 0.1% in 2023 but rebound by 1.9% in 2024. The withdrawal of pandemic-related support measures and tight monetary conditions will hold back consumption and investment during 2023, but these effects should abate by early 2024.”

Statistics released in mid-August showed that Chile’s economy has contracted for three consecutive quarters, with a significant decline in investments. The report indicated a GDP contraction of -1.1%  between April and June 2023, on an annualised basis. Economists surveyed by the central bank in August estimated a fall in GDP of -0.50% by the end of the year. If this forecast comes true, Chile will be one of the few LATAM countries to end up with negative growth statistics in 2023.

The Central Bank of Chile And The Chilean Peso

The Central Bank of Chile (Banco Central de Chile) was established in 1925. One of the objectives of the Central Bank of Chile is to ensure the stability of the currency, that is, to keep inflation low and stable over time. The Bank also fosters the stability and efficiency of the financial system, ensuring the normal functioning of internal and external payments. According to its website, the Central Banko of Chile “adopted a monetary policy regime with inflation targets and a floating exchange rate policy. The target established under this regime is that annual inflation (measured as the percentage variation of the CPI over a 12-month period) remain most of the time around 3%, with a tolerance range of +/- 1%.”

The Chilean peso is issued by the central bank and has been in circulation since 1975 in its current version. The Chilean peso was allowed to float within a crawling band between 1974 and 1979 and after that was pegged to the US dollar at a fixed exchange rate for the next three years. In 1984, the Chilean peso returned to a system of adjustable crawling bands until 1999 when it was allowed to float freely against the US dollar.

Trading The Chilean Peso And Its Performance

The performance of the Chilean Peso against the US Dollar since 2018 has been influenced by economic factors, particularly fluctuations in copper prices, and efforts to maintain stability in the face of external pressures.

The US dollar to the Chilean peso pair remained relatively stable for a period, but it faced challenges when the price of copper, a crucial export for Chile, declined. This decline impacted the Chilean peso negatively, causing it to weaken against the US currency.

In July 2023, the Central Bank of Chile announced the strongest rate reduction in the last 14 years with a drop of 100 basis points from 11.25% to 10.25%, which helped the US dollar strengthen against its Chilean counterpart.

What Do Analysts Forecast For The Chilean Peso And The Economy

Currency analysts at ING said in a report released earlier in September that Chile has embarked on a large monetary easing cycle. “Chile’s central bank followed up its 100bp easing in July with a 75bp rate cut in September. The policy rate is now 9.50%. Expectations have been guided for the policy rate to be cut to 7.75/8.00% by year-end, with meetings in October & December. Confident rate cuts are being made on the fact that two-year inflation expectations are stable at 3%. Yet core inflation is still currently over 8%. Should core not fall as quickly as expected and the central bank still cut, the CLP could be hit harder. The external environment has not been kind to Latam currencies. But if we are right with our dollar call, USD/CLP can edge lower later this year,” they noted.

In mid-September,  Morgan Stanley’s analysts appeared optimistic regarding Chile’s euro and US dollar bonds citing “cheap valuations compared with most investment grade names, its lack of expected issuance in the near term, and a continuous recovery in its macro backdrop. Political risk had also fallen, they said, with the government forced to scale back plans to raise taxes.” 

A report by Wells Fargo said that the central bank of Chile may be cutting interest rates more aggressively than financial markets expected. More specifically, Wells Fargo analysts suggested that “ policymakers in Chile and Brazil seemingly feel comfortable enough easing monetary policy aggressively. As a result, we are revising our Chilean Central Bank policy rate forecast lower to reflect policymakers' stance, and we now believe the Chilean overnight rate target can fall to 7.25% by the end of this year.

Risk Management When Trading The Chilean Peso

Trading the Chilean peso, just like every other currency in the forex market, involves risk. While the right moves could bring you closer to making your financial dreams a reality, the wrong ones could cost you dearly and become a burden when it comes to your financial plans. Being a beginner trader means that you may not know the dangers of navigating volatile markets.

There are ways to bridge the gap with more experienced traders; one of them is education. Studying how trading works and its fundamentals will cost you some time but could save you some money in the long run. Now you may wonder what do you need to start studying? All you need is access to educational materials such as how-to guides, videos, e-books and articles on trading prepared by experienced traders. Brokers do offer access to educational hubs so there is no lack of resources.

One more way to reduce risks when trading is to use risk management tools that are embedded in trading platforms. By utilising these tools and making them a part of your strategy you may be able to save some of your hard earned funds if markets move against your plans. Learn how to use risk management tools such as the stop-loss orders that can help you minimise anxiety and stress when you execute your trading strategies.

Does trading on macroeconomic news interest you? Learn how this approach works with our free webinars. Meet and interact with experienced traders. Watch and learn from live trading sessions. 

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.