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The odds that the global economy will suffer a harder landing than expected are increasing. Inflation data continues to surprise the market and the odds of the world’s major central banks increasing interest rates more sharply, and with it the risks of a recession.

On Friday, US inflation data was released. In May, the consumer price index (CPI) of the world’s largest economy increased by 1%, cumulating an increase of 8.6% over the last 12 months, its highest level since December 1981 (8.9 %).

The data hit stock markets, as well as global currencies. In Chile, the exchange rate climbed $20.6 on Friday, and on Monday it continued on the same trajectory. The dollar closed at $862.89, up $16.9 from Friday.

Over the past three days, the US currency has accumulated a $40.4 rise in Santiago and the Chilean peso is the eighth most weakened currency in the world against the dollar.

Sergio Lehman, chief economist at BCI, says that “we see that exchange rate volatility has increased significantly, not only in Chile but also globally. This is linked to the high uncertainty perceived today, due to the rate hikes that are coming and the effects they could have on global activity, without excluding the probability of a recession. In Chile, local and more structural factors are also recognized, associated with a more vulnerable economy today and the political risks linked to the constituent process.

Why is the peso falling against inflation data? The possibility of a higher-than-expected rate hike by the Fed to contain higher-than-expected inflation implies that the potential return from investing in US dollars could be higher than investing in currencies. other countries, so that investors withdraw resources from weaker currencies and take refuge in the dollar, in search of higher profitability.

Additionally, Luis Felipe Alarcón, chief economist of EuroAméricapoints out that the inflation data took the local market by surprise as in recent weeks flows from non-resident investors and AFPs turned against the peso.

Klaus Kaempfe, Regional Director of Portafolio Solutions at Credicorp Capital, comments that the volatility the peso has shown is due to uncertainty, and the lack of predictability of the future leads to “Possible options for the market are more diverse, coupled with the fact that Friday’s inflation data increases the likelihood of a hard landing.”

This, in his view, is producing the outflow of riskier assets by investors, hitting emerging economies, which in turn pushes the peso higher.

According to Sebastián Senzacqua, director of economics and strategy at Bice Inversiones, “this short-term situation (inflation data) has given the dollar a boost due to the rise in interest rates in the United States. United, but at the same time, we think concerns about economic growth in the coming months are starting to take on a little more importance, as a more aggressive rate hike in the US will impact less buoyant activity in the future “.

Added to concerns about what is happening with the Fed and growth is the fall in the price of copper. The price of the red metal closed on Monday down 2.59%, at US$4.21 per pound, on the London Metal Exchange, while three-month futures for the metal fell 2 .31% to US$4.20 per pound.

“In the Chilean case, the fall in the price of copper also contributes to this, since it is an important source of foreign exchange for the Chilean economy”, explains Francisco Simian, chief economist at Altafid.

According to Luis Felipe Alarcón, the situation will not necessarily be reversed, since it will depend on the decision that the Fed took on Wednesday. And it is that “if it comes out very aggressive, it can continue to raise the exchange rate”, since if it raises its rate even more, the flow of dollars will return to the United States to the detriment of emerging economies.

“The market anticipates that the Fed could raise 75 basis points and not 50 as it had anticipated”, explains the economist.

“In this way, this short-term situation has given the dollar a boost due to a higher level of interest rates in the United States, but at the same time, we believe that the concern about growth the coming months, given that a more aggressive rate hike in the United States will have an impact on less dynamic activity in the future”, adds the leader of Bice, Sebastien Senzacqua.

And the effect on inflation? According to Kaempfe, if these levels continue, it will be an additional factor that will push up inflation, “But that doesn’t change the fact that we’ll be more normal by the end of 2023. We’re already with inflation so hard that it doesn’t change the scenario.”

“It would have effects on inflation, but in a fairly limited way. Today, other factors prevail. I also see that it would be a more transient event, associated with an exacerbated market response,” adds Lehmann.

But it wasn’t just currencies that were hurt by the inflation data and the consequences that a higher Fed rate hike could have: the Dow Jones and the S&P500 lost 2.79% respectively. and 3.88%, and the IPSA fell 2.02%.

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