Latam FX muted, Chile's peso dragged lower by copper losses

Chile's peso slipped to a 17-month low on Tuesday as concerns over Chinese demand spurred losses in copper prices, while broader Latin American currencies were muted as fears of a global energy crunch kept sentiment muted.

The peso fell 0.6% to 829.1 to the dollar, its weakest level since May 2020 as copper prices dropped on fears that a global energy crunch could stifle demand, particularly in major consumer China.

Investors were also anticipating an interest rate decision from Chile's central bank on Wednesday, in which it is expected to hike rates by 100 basis points (bp) to 2.50%, amid a recent spike in inflation.

But analysts have questioned the efficacy of the hike, given that the Chilean bank has been much slower to raise rates, in comparison with its emerging market peers. The yield on the peso is also relatively lower than currencies in Brazil and Mexico.

"Given recent macroeconomic and financial developments, the central bank would benefit from sending an unequivocal signal that it is determined to stay ahead of the rapidly deteriorating current and expected inflation dynamics," Goldman Sachs analysts wrote in a note.

Chile's peso hits 15-month low as inflation fears dent Latam FX

"We see it as a somewhat close call between a 75bp and a bolder 100bp rate increase (possibly even up to 150bp)."

Broader Latin American (Latam) currencies moved little as investors remained on edge over a global energy crunch, as well as a possible debt crisis in China, which is a major export destination for Latam.

A recent surge in oil prices also raised concerns over high inflation, which could stifle economic growth in emerging market currencies.

But the currencies of oil exporters Mexico and Colombia have gotten some support from crude prices in recent weeks.

Mexico's peso was flat on Tuesday, as industrial output beat expectations in August.

Colombia's peso rose slightly to a one-month high. The currency extended gains into a fourth straight session after Moody's upgraded its outlook on the country, citing recent economic resilience.

Brazilian markets were shut for a holiday.