Whether you’re investing in business or the country itself, there’s a good reason to keep an eye on Chile. Its stable economy and high international trading activity make Chile a fertile ground for companies and individuals to do business. To navigate investments in Chile, first you need to understand its currency. This article is a breakdown detailing everything you need to know about the Chilean Peso.
What is the Chilean Peso (CLP)?
Chile’s currency has a rich history. While the Chilean Peso was initially in circulation in the 19th century, in 1960, a new currency was established: the escudo. However, in 1977, the peso was reintroduced and it has been the currency in Chile ever since. The peso was entered circulation with both coins and banknotes. The first coins were centavos, which were valued at 100 units to one peso. However, due to inflation, in 1984 the centavo became obsolete. Peso coins slowly entered circulation in increasing denominations from 1976 to 2000. Banknotes have also increased value-based denominations, with the latest being the 20,000 note introduced in 1998.
What is the Chilean Peso Managing Entity?
Since 1925, the Banco Central de Chile has been the government entity that manages the nations financials and currency. This establishment was created when the government underwent a restructuring system for monetary deeds. The bank is an independent, autonomous entity that exists to aid in economic stability and progress. The Monetary Council manages the credit, foreign exchanges, tariffs, and more under the Executive Power. The main priority of the bank is to ensure the peso remains stable, while at the same time keeping inflation low and in control during changes in economic times.
How is the Chilean Peso written?
Today, the peso takes the form of both coins and banknotes. The coins come in 1, 5, 10, 50, 100, and 500 peso values, while the banknotes have denominations of 1000, 2000, 5000, 10,000, and 20,000. When spending in Chile, however, retailers often round to the nearest 10 peso value. When notating the Chilean Peso, a $ is used in front of the price. This is because the Peso was intended to align with the U.S. Dollar (USD), which has the same notation.
The peso enjoys activity in the global markets. The delineation for the Chilean Peso is CLP. When investing in the Chilean Peso, look for the CLP symbol, not the $.
How is the Chilean Peso Valued?
The peso has adopted several currency rate designations, each based on the best option for the economic time. When the peso was first introduced, the currency had “crawling band” exchange rate values. Crawling band means the exchange rate is fixed to another currency, but with flexibility. So a local currency will peg to a major currency, which has a par value. The par value is set within a range of rates, which fluctuate with the market. Within the par value’s band of rates falls the crawling band currency. The crawling factor, then, is how the rate adjusts within the par value’s range.
Crawling band rates are common in emerging markets like Chile. Most currencies that opt for a crawling band rate align with the USD or the Euro (EUR). When Chile reintroduced the peso, the currency pegged the dollar, hence the $ symbol.
Is the Chilean Peso Fixed or Floating Today?
Fixed (or sometimes called pegged) rates occur when one currency chooses a major currency to fix with – that is, the local currency sets its value based on whatever the major currency’s activity does in the global markets. In a floating currency, the government controls the exchange rate as it fits with the local economy. Benefits of a fixed-rate currency include tamer value fluctuations, devaluation control, and, if appropriately fixed, can manage inflation from a rampant rise. With floating rates, currencies are stable within their own local economy – in other words, if a country with a major currency has a strong economy while the local nation is undergoing some economic strain, the floating exchange rate will ensure the currency’s value won’t fluctuate drastically to send the nation into debt or cause inflation.
While Chile adopted a crawling band rate when the peso emerged in 1977, the currency changed to a fixed rate pegged to the USD in 1979. In 1982, however, the peso was strained from overvaluation, and so the currency returned to the crawling band rate. As the economy got stronger and more stable, the currency changed to a floating rate in 1999, where it remains today.
Is Chilean Peso a Restricted Currency?
Yes, the peso is restricted. Many countries adopt restrictions in order to manage the currency’s valuation and limit the potential for fraud. All currencies were once restricted, making it a long-standing precaution. Chile’s restriction lies in the inability to use the peso outside of the country. FX payments are limited to residents in the country. That said, residents and non-residents of Chile may open currency accounts, both in Chile and overseas. For all other situations, though, travelers must convert in Chile after they arrive, and they must exchange before departing the country.
There is one exception, however. Chile and China have a growing relationship, particularly because China is a high trade entity for Chile. The result is a currency swap, which has a sizable limit that enables trade to escalate. This agreement results in a stabilization in Chile and in turn South America, due to the increased economic activity. The agreement can help cushion and protect Chile’s vulnerabilities to volatile markets.
How Does the Chilean Peso Convert to Major Currencies, and Why Does That Matter?
While the Chilean Peso is a floating currency, how it stacks up to other currencies is important for investors to know. CLP to USD tends to strongly favor the USD , while the CLP to EUR also favors EUR, but less so than USD. The third major currency to compare with CLP is the British Pound (GBP), which is typically the most competitive exchange.
This information is useful in understanding valuation as a traveler in the Chile, even for visitors who are not from these major markets. Most currencies are valued against the USD, EUR, and GBP, so knowing those exchange rates with CLP will give an understanding of value, so long as visitors know their home currency’s exchange rate with those same major currencies. The most common exchange rate against the Peso is the USD.
Investing in the Chilean Peso
Currencies are popular investments in the forex market. When investing, participants are taking part in the economic stability of that currency’s nation. To make things interesting, with forex, participants invest in currency pairs. This is a greater gamble, but can pay off if done properly. In currency pairing investments, the buyer is betting on how the currencies will perform against one another. The first currency in the listing is the “base,” that is, the currency that the buyer is aligning with, while the second currency is the one which will determine how this base currency will pay out to the investor – a rise is a loss, while a downgrade is a profit. Since governments intervene in floating currencies, like Chile’s, buying and selling can be countered with local participation in the markets.
Even in the worst of economic times, Chile’s floating currency paired with its mediating central bank and strong ties as a trading nation make it a currency to invest in, and a country to watch.