Demonstrators clash with riot police during a protest demanding greater social reform from Chilean President Sebastián Piñera, November 12 2019. Picture: JAVIER TORRES / AFP
Demonstrators clash with riot police during a protest demanding greater social reform from Chilean President Sebastián Piñera, November 12 2019. Picture: JAVIER TORRES / AFP

Santiago — Chile’s central bank will offer $4bn 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 on Wednesday will come into affect on Thursday and continue until January 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  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 October 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 Sebastián Piñera in a speech to the nation  on Tuesday 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  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 on Tuesday that it would pull $1bn from its sovereign wealth fund in the next few days and another $1.4bn 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 programmes of dollar buying. More recently in 2017, Mexico’s central bank offered a programme 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.

Bloomberg