Three Reasons to Consider the Chilean Peso

Investments in China and Brazil are a bit overdone at the moment. Don’t get me wrong, there’s still plenty of upside for both currencies — but not quite at the rate of the last few years.

So, where can an international investor seek higher rates of return? Try the Chilean peso. Although the currency has enjoyed brief run-up in recent quarters, there is still plenty of upside room left. Let’s take a quick look at why.

For one thing, Chile’s economy is absolutely booming. It is expected to grow by 5.1% this year and rise to 6.1% next year. Central Bank of Chile Governor Jose De Gregorio is even [don’t be wishy-washy] more optimistic — setting growth estimates in the 5.5%–6.5% range.

Most of those gains will come from Chile’s extensive copper exports. Chilean mines have been the top global copper producers for many years — producing approximately 6 billion metric tons last year. The base metal is a necessity for both industrial and commercial uses. And being in South America gives Chile relatively easy access to markets in the United States, the European Union and major economies in Asia, not to mention nearby Brazil.

In fact, not surprisingly, trade with China and Brazil has been booming for three years now, thanks to their insatiable hunger for Chile’s copper. Their steady and increasing demand for the versatile metal will lead to further appreciation in the currency as importing nations exchange pesos to complete their trades.

The country’s rapid pace of growth is also being fueled by accelerations by a healthy employment rate. President Sebastian Pinera promised to create approximately 200,000 new jobs over the next four years. And while politicians all over the world have been making the same promises, Pinera has actually done that and better. So far, 290,000 new jobs have been added — and many economists are estimating a possible top out of 300,000 before the year is over.

The phenomenal increases in employment are helping increase the country’s corporate investment and spending. But more importantly, the gains in the labor force are helping to support income growth and personal spending. Chilean domestic consumption skyrocketed in the first three months of the year — vaulting higher by over 11%.

This is a far cry from comparable spending in the United States — which is rising by only 2.6% so far this year. Should Chile’s domestic growth continue — and all signs say it will — rest assured that domestic consumption will continue to rise, adding to the country’s growth prospects.

Now, as with any other booming economy, you must consider the risk of higher inflation rates. As the Chilean economy expands, higher consumer prices are inevitable — but so are higher central bank rates.

Since the 2008-09 financial crisis, the Central Bank of Chile has raised rates for five straight months. Its overnight lending rate went from a record low of 0.5% to 2.75% in an effort to combat 2% inflation. And more rate hikes are expected before the year is out and heading into 2011. These higher interest rates are going to attract more foreign investors searching for a retail return that’s higher than current rates.

With higher economic prospects for the Chile thanks to stable demand for copper, growing employment and foreseeable interest rate hikes, it’s difficult to see how the Chilean peso won’t be a great and appreciable currency in the long term.

Richard Lee
for The Daily Reckoning