Copper Rout Spurs Chile Rate-Cut Bets as CDS Jumps
Comment of the Day

April 29 2013

Commentary by Eoin Treacy

Copper Rout Spurs Chile Rate-Cut Bets as CDS Jumps

Copper Rout Spurs Chile Rate-Cut Bets as CDS Jumps
“Naturally we have to monitor it,” Vergara said about copper price declines in an April 19 interview in Washington.

“It can have major impact on some variables such as income, internal demand, fiscal policy, external accounts, and of course the exchange rate.”

Copper's erosion has contributed to a weakening of the Chilean peso, which has depreciated against the dollar by 0.3 percent since Feb. 1 after increasing 1.7 percent in the first month of 2013. The peso fell 0.2 percent to 472.95 per dollar on April 26.

The yield on Chile's 10-year bonds fell one basis point April 26 to 5.27 percent. The 10-year inflation-linked bond yield fell two basis points to 2.41 percent.

The cost of protecting Chilean bonds against default for five years was little changed at 67 basis points at 8:12 a.m. in Santiago, having increased one basis point since the end of March. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.

Eoin Treacy's view As home to some of the world's most influential commodity export markets Latin America has tended to benefit from investment inflows when prices of commodities are firm. However, recent softness in commodity pricing has weighed on the region's equity markets.

The Brazilian Bovespa index has returned to test the lower side of its 18-month range near the psychological 50,000. A sustained move above 56,000 would break the short-term progression of lower rally high and would confirm support in this area.

Mexico has been among the region's better performers. It hit a medium-term peak near 46,000 in February and has returned to test the region of the 200-day MA. A clear upward dynamic, held for more than a day or two, will be required to confirm a return of demand dominance in this area.

Chile and Colombia have returned to test areas of previous support but clear upward dynamics will also be required here to question the current downward bias. Peru has been among the weakest markets during the current corrective phase and is testing the region of its 2011 lows. It has now fallen for 10 of the last 11 weeks and while oversold a clear upward dynamic will be required to check momentum.

In local currency terms, the Argentine market is bucking the above trends and hit a new all-time high last week. However the weakness of the Peso has flattered that performance. In US Dollar's the Merval Index broke out of a three-month range.

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