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I thank Ulric Erickson von Allmen, Jorge Chan-Lau, Fei Han, Charles Kramer, J. Daniel Rodriguez, Hui Tong, Shengzu Wang, seminar participants at the Central Bank of Chile, and in particular Diego Gianelli G., Philip Liu, and Li Zeng for very helpful comments and suggestions, and Matias Arnal for help with data. All errors are my own. The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management
This is partially due to barriers for nonresidents to enter the local bond market. For example, registering to buy bonds in Chile takes about six months (Bloomberg, 2013).
Domestic banks are the counterparty to these long peso positions in the onshore market, and they would sell dollar in the spot market to balance it, strengthening the peso in the spot market.
These investors would hold simultaneous short peso positions vs. dollar and long positions in Brazilian real vs. dollar.
This could be a self-enforcing circle: the peso’s appreciation may attract more long peso positions in the forward market, which would strengthen the peso in the spot market further. Granger causality tests do suggest that nonresidents’ forward position and the peso exchange rate have predicting power over each other.
Pension funds’ net short dollar positions in the off-shore market were much smaller, at $54 million at the same time. Ideally pension funds’ net transactions in the spot market should also be controlled for, but these are not published (and relatively small).
Which is the reason that Chen, Rogoff, and Rossi (2010) find that commodity currency exchange rates have robust power in predicting global commodity prices, since they already incorporate expectations of future commodity prices.
Oil imports accounted for 8 percent of total imports in 2012.
Level regression would yield a substantially larger coefficient. The Chile-U.S. interest differential is of the “wrong” sign in Cowan, Rappoport, and Selaive (2007).
We also used the average CDS of European banks to replace Spain-Germany spread as the measures of financial distress in Europe, which is also insignificant.