Two central banks in Latin America intervened this week to prop up their currencies, which had fallen to record lows against the dollar as political friction and social unrest spread across the continent.
The Chilean central bank said on Thursday it would sell as much as $20bn in currency interventions, equivalent to half of its international reserves, starting on Monday. Brazil’s central bank also sold dollars several times this week, after not having done so for three months, as both nations tried to apply the brakes on currency depreciation.
The central banks’ moves to try and boost their currencies come as slow income growth and corruption rattle countries across Latin America, fuelling the flames of social and political unrest, most recently in Chile, Colombia, Bolivia, Ecuador and Peru. In Chile, violent demonstrations have caused 26 deaths and 13,000 injuries.
“For the first time in a long time we have seen contagion,” said Ilan Solot, a currency specialist at Brown Brothers Harriman in London. “Ever since Turkey started blowing up last year, and then Argentina, people have asked whether there would be contagion [to other emerging markets] and the answer was always no. But Chile is having an impact on sentiment [in the region] and brings up the spectre of social unrest in Brazil.”
Mr Solot said central bank intervention in Colombia, where there have been nationwide street protests over the past week, “must be a possibility” given the Colombian peso’s recent slide beyond 3,500 to the dollar.
He said negative sentiment had also hit the Mexican peso, although there was no sign yet that contagion was spreading beyond Latin America.
The Chilean peso has weakened 8 per cent against the dollar this month, and 14 per cent over the year. The Brazilian real has suffered similar losses, dropping 5 per cent against the dollar this month and 8 per cent over the year.
“The events that have occurred in our country in recent weeks have impacted the normal functioning of the economy,” Chile’s central bank said in a document released on Thursday, forewarning the currency intervention to begin next week and last through to May 2020.
While the Brazilian government remained silent on the amount it had sold, the Chilean government announced its programme would consist of up to $10bn in dollar sales on the spot foreign exchange market and $10bn in sales of “exchange hedging instruments”.
Chile said it would continue to use “all the tools available” to achieve its 3 per cent annual inflation target and attempt to stabilise the volatile exchange rate.
It has been eight years since Chile’s last currency intervention. In 2001 and 2002, the central bank intervened to sell dollars, and in 2008 and 2011 to buy them.
Mr Solot said Chilean policymakers were probably counting on the impact of their announcement to stabilise the peso and may have decided transparency was the better option having witnessed events in Brazil. “I would venture a guess and say they saw what happened in Brazil and decided to do the opposite,” he said. “In Brazil, ministers signalled that everything was fine but then came out with intervention. Now they are paying the price. What happened in Brazil felt very ad hoc.”
The real has been under pressure since the middle of this year, with a fresh slide over the course of November prompted by general weakness in emerging markets, a series of interest rate cuts and disappointing results from a much-hyped oil auction at the start of the month.
But late on Monday, top policymakers dismissed concerns about the exchange rate. “We have a floating currency, so it floats,” said Paulo Guedes, finance minister, in comments that prompted the real to sink further.
The currency regained some of its losses at the end of the week, though not necessarily as a result of the central bank’s intervention. The economy ministry said on Thursday it had previously misreported November trade figures by a wide margin and that exports to the fourth week of the month had been worth $13.5bn rather than $9.7bn as previously stated.
The real recovered from R$4.26 to R$4.19 to the dollar on Thursday after the statement, before again falling below R$4.23 during trading on Friday.