Wednesday, January 07, 2009

Chilean Stimulus Package

Emerging Markets currencies and rates continued to rally today as risk seems to be back in vogue. Chile is the latest country to announce a substantial stimulus package. The plan is to sell bonds and tap savings in an effort to spur a slowing economy. The currency rallied all day closing at 624 and blue chip stocks rallied 2.52% in response to the move.

“They built up their war chest and now they’re using it,” Joydeep Mukherji, Standard & Poor’s sovereign risk analyst for Chile, said by telephone from New York today. Chile has “the highest credit rating in Latin American precisely because of these kinds of policies.”
The Finance ministry believes this move will enable the country to create 100,000 new jobs and allow the economy to grow by 2-3 percent. With the size of this package the Chilean government is certainly not fooling around. It looks as if the good feeling is spilling over to other Latin American economies as Brazil, Mexico and Colombia have all responded positively as well.

Currently Latin American yield curves are all inverted as the market continues to look for rate cuts sooner then later. Chile has a rate announcement later this week and the market is now looking for 75-100bp up from 50bp earlier. I think lower rates in this region with a steepening curve in the States will force interest rate differentials to converge. Not that the Fed will raise rates but as people get fed up with earning 0% with Treasury Bills I can see them looking for alternative investments.

The Euro which opened considerable lower, reversed course and is closing at the highs of the day. I am looking for this currency to make a move higher.

Good Luck and Good Currency Trading



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