Chile's peso weakened sharply on Friday on concerns that authorities could intervene to stem currency gains that may hurt exporters while Brazil's real traded flat after a top official threatened to implement capital controls. Investors are increasingly concerned that governments will intervene in the market to offset capital inflows resulting from US and European stimulus measures.
Brazil, Colombia and Peru are already intervening to dampen currency gains, and some think Chile could be the next to act. Chile's peso lost 0.6 percent to 473.20 per dollar after it failed to break the psychological barrier of 470 per greenback. "Traders are hesitant to add long positions below 470 on fear of intervention," said Katia Diaz, an economist with 4CAST in New York.
With gains of more than 10 percent so far in the year, the Chilean peso has currencies that strengthened the most in 2012 and it hit a one-year high this week. Other traders said the peso slipped as investors took profits on the surge in the currency after the European Central Bank unveiled a bond-buying program to support indebted countries and the Fed launched its own asset-purchase stimulus to boost growth in the United States.
The Chilean central bank is increasingly expected to voice its concern about an over-valued currency before intervening in the market, analysts said. A trigger for central bank action could be a peso at 460 per dollar, they added. "Close to 460, there will need to intervene in the exchange market. At that level the export sector will be less competitive and that will be reflected in the trade balance," said Carlos Rumie, trader at Celfin Capital in Santiago.
The Brazilian real held steady for the fourth consecutive session, to bid at 2.0225 per dollar. Finance Minister Guido Mantega threatened to make use of short-term capital controls to curb any currency gains that could hurt exporters. "Selling the dollar and buying the real is a global trend. But local investors are not following that, they are mindful of the intervention threats from the Brazilian authorities," said Alfredo Barbutti, chief economist at BGC Liquidez brokerage in Sao Paulo.
So far, the Brazilian central bank has been able to keep the real weaker than 2 per dollar since early July with the sale of reverse currency swaps - derivatives contracts that emulate the purchase of dollars in the futures market. If dollar inflows pick up, however, it may resume outright dollar purchases in the spot market. If that fails, investors can probably count on the Finance Ministry to raise financial taxes on short-term capital flows.
The Mexican peso, one of the few currencies in the region that investors consider free of intervention risk, traded flat. Traders said the Mexican currency's could advance back toward a more than five-month high next week if Spain requests financial aid to help ease the country's debt crisis.