Paraguay cuts interest rate to boost inflation sending currency to 8-year low

The central bank of Paraguay slashed the benchmark 14-day interest rate on Thursday as inflation remained below the central bank target, and the rate move has pushed the currency guarani to a new eight-year low against the dollar.

USD/PYG rose to 5,190, its highest since early 2007. The guarani has fallen 1.3% so far this month, extending the nearly 10% loss since January to the end of last month.

The main rate now stands at 6% after Thursday's 25 basis points cut, which is the third cut of that size in this year.

Annual consumer price rise rate has been below 4.5% since mid-2014 and the rate cuts this year have helped it rebound to a four-month high of 3.3% for May, moving off a two-year low of 2% hit in the previous month.

However, the central bank that has an inflation targeting regime with regard to its monetary policy has some way before it achieves its CPI goal.

Moreover, economic growth has been tepid in the Latin American country from last year. The year-on-year GDP growth rate averaged 4.3% over the four quarters of 2014 compared to 14.2% in 2013. In the first quarter of this year, the expansion rate was 4.2%.

Technically, the USD/PYG pair has hit a channel resistance with the recent rise increasing the likelihood of a correction in the coming weeks.

On the way down, 4,960 and 4,720 are the immediate supports ahead of a more important 4,500, a break of which will significantly weaken the uptrend since July last year.

In case of a surprise move further higher, the pair will target 5,400 in the big picture although several intermediate levels could be plotted on a small picture chart.