Having suffered at the hands of the protracted drawdown in global copper prices over the course of 2011-2015, Chilean copper production has recovered in line with the rally in prices since the beginning of 2017. This in turn has allowed the Chilean peso-copper correlation to reassert itself. As the chart below shows, the 1-year correlation has risen to 37% up from a low of 21% in September 2017. Although the Chilean economy has become less trade dependent since the financial crisis, the copper intensity of exports has recently increased. Total exports to GDP has fallen to 29% from a pre-crisis peak of 45%, while copper exports dropped to a low of 46% of total exports from 58% in 2011, but has recently shot back up to 51%.
While this augurs well for economic growth, domestic liquidity and Chile’s balance of payments position in the near term given the current recovery in the copper market, the rising correlation to copper prices will also increase CLP volatility. Chile is very sensitive to copper prices, especially when UST yields have risen and the USD has rallied.
(Click on image to enlarge.)
Source: Bloomberg, Macrobond and Variant Perception