(Updates with new forex graphic)
By Brad Haynes
SANTIAGO, Oct 20 (Reuters) - Chile may take new measures as soon as this week to control its sharply appreciating currency, which has tested the Andean country’s hands-off approach to markets as it aims to become a regional financial hub.
Countries from Thailand to Peru have taken steps to curb their strengthening currencies as investors chase high interest rates provided by fast-growing emerging economies.
Chile Finance Minister Felipe Larrain warned, "We may have something to say this week" as the country studies "alternatives" for controlling the peso CLP=CL.
The peso has strengthened more than 12 percent against the dollar since the end of June. But the country has held off so far on buying dollars in the local foreign exchange market, like Colombia, or raising taxes on foreign investment in local assets, as Brazil has done twice since the beginning of October.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For a Latam forex graphic, see r.reuters.com/qaq49p For a Chile forex graphic, see r.reuters.com/raq49p Factbox on steps to counter hot money [ID:nSGE69503F]
As its peso hovers around 485 per U.S. dollar, near 28-month highs, here are some of Chile’s options:
ENCOURAGE CAPITAL OUTFLOWS - LIKELY
One likely approach would be to offset incoming investment with increased capital outflows.
President Sebastian Pinera, a billionaire businessman, said this week in London that he is not planning capital controls, and he would like to stem the peso’s appreciation by encouraging more Chilean investment abroad.
Last month Peru raised the amount of assets that pension funds can hold overseas in an effort to increase dollar demand and lessen the pressure placed on its currency by capital inflows.
Chile’s central bank has already lifted the limits on investment abroad for local pension funds by as much as 20 percentage points over the past two years.
Few of the funds in the privately-managed pension system are now investing in foreign assets to the maximum extent allowable. Even with greater freedom to invest abroad, it isn’t clear how much more of the $138 billion under management would be moved out of peso-denominated assets.
ADJUST HEDGING FOR PENSION FUNDS - POSSIBLE
A change to hedging regulations for the pension system would be more likely to trigger an immediate market reaction.
In January, an adjustment to local pension funds’ hedging requirements reduced their bets against the dollar in the forward market, triggering a dramatic peso sell-off that weakened the currency nearly 8 percent in less than two weeks.
Then as now, the peso had appreciated sharply, touching its highest levels in more than a year. Confusion about the new hedging requirements was enough to shock a nervous market, as pension funds bought back their hedges and exacerbated the local currency’s drop.
BUY DOLLARS ON THE MARKET - UNLIKELY
A direct intervention in the local foreign exchange market remains unlikely at the peso’s current level but could have a major short-term impact.
The central bank has not intervened since 2008 and has accumulated more than $25 billion of international reserves. Daily volumes in the local currency market average a little more than $1 billion.
Central bank Vice President Manuel Marfan said on Tuesday the bank had not discussed intervention, although he said the peso was already pushing slightly past values justified by economic fundamentals.
The central bank may look closer at intervention if the peso continues appreciating despite a slower pace of interest rate hikes. The bank raised its key rate by 25 basis points last week after four 50 basis-point increases, citing the strong peso, but said rates will keep rising. [ID:nN14173354]
When the central bank last intervened, authorities waited until the market flirted for nearly a month with levels around 430 per dollar before stepping in to buy greenbacks.
FOCUS ON EXPORTERS - LOW IMPACT
The government could extend direct aid to exporters feeling the currency squeeze, offering them help without significantly affecting the exchange rate.
Already Chile has extended small businesses credit in dollars through a state bank and worked to increase farmers’ access to hedging operations. The government could expand those measures or offer new tax breaks for exporters and Chilean countries investing abroad. (Editing by Hugh Bronstein and Chizu Nomiyama)