On the Central Bank intervention in the FX market

CHILE - In Brief 29 Nov 2019 by Igal Magendzo

Yesterday the Central Bank of Chile announced a foreign exchange intervention plan of up to US$ 20,000 million, US$ 10,000 million of sales in the spot market and US$ 10,000 million of sales of hedging instruments. International reserves are approximately US$ 40,000 million. The statement published by the Bank emphasizes that the concern is not about the level reached by the exchange rate, but because "the speed and succession of movements in the same direction have generated volatility that is estimated to be excessive." In effect, the exchange rate went from 726 pesos per US dollar in 30 October to 746 in 11 November and then umped to 801 in the next for days, reaching a pick of 828 yesterday. The fact that the Central Bank emphasizes that this is not about the level of the exchange rate leaves the door open for another 25bp cut of the Monetary Policy Rate (TPM). However, if until the day of the Monetary Policy Meeting the CLP goes back to the levels before the intervention without mediating a relevant change in the macroeconomic or political conditions, the Central Bank will keep the TPM at 1.75%. Given the size of the intervention and that there seems to be a certain shortage of dollars in the spot market, it is not surprising that the intervention had a significant impact on the exchange rate that today fell to close to 810 pesos per US dollar. However, if uncertainty continues, the price of the dollar will go up again, although probably at slower pace.

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