Colombian Peso Loses Value, But For How Long?

Source: Bloomberg

Colombia’s peso fell for the first time in a week after the central bank said it will resume dollar purchases in a bid to ease a rally in the local currency and shore up exports.

Banco de la Republica will buy a minimum of $20 million a day in auctions for at least three months starting today in a bid to boost international reserves, according to a statement issued Feb. 3 after markets closed. The peso fell 0.2 percent to 1,787.30 per dollar from 1,784.50 on Feb. 3.

The peso has advanced 8.5 percent this year and touched a five-month high on Feb. 3 as central bankers raised thebenchmark interest rate, luring investment to the country’s fixed-income market, to cool growth and keep inflation in check. While the three-month dollar buying program may slow the peso’s gains, it’s unlikely to reverse the currency’s rally, said Juan Nicolas Garcia, a currency trader at HSBC Holdings Plc’s Colombia unit.

“The central bank’s pain threshold seems to be around 1,780,” Garcia said. The peso may weaken toward 1,800 per dollar before reversing course because “increased appetite for risk, the carry trade and Colombia’s solid growth” will fuel demand for pesos, he said.

The carry trade refers to the practice in which investors borrow funds in a country with lower borrowing costs and buy assets where interest rates are higher. Colombia’s benchmark rate is 5 percent, compared with near zero in the U.S.

Regional Efforts

Policy makers in Latin America are stepping up efforts to curb currency gains. Brazil’s central bank bought dollars in the currency forwards market on Feb. 3 for the first time since July to stem an 8.3 percent rally in the real this year.

While developing nations from Brazil to the Philippineshave been cutting borrowing costs to shore up growth amidEurope’s debt crisis, the Colombian central bank has raised rates to prevent the economy from overheating. Colombia’s gross domestic product grew 7.7 percent in the third quarter, the fastest since 2006.

“The pace of appreciation had been picking up and the central bankers were obviously ready to do something about it when that happened,” said Daniel Lozano, an analyst at Serfinco brokerage in Bogota.

Banco de la Republica said in a statement today that it’s scrapping its plan to auction dollar options whenever the peso’s 20-day moving average changes by more than 4 percent.

Unsustainable

Policy makers may buy more than $20 million daily or adopt additional currency measures should the peso strengthen beyond 1,770 per dollar, HSBC’s Garcia predicts.

Central bank President Jose Dario Uribe said in a Feb. 5 interview with newspaper El Tiempo that without recent increases in the nation’s benchmark rate, the pace of economic growth would be unsustainable.

Agriculture Minister Juan Camilo Restrepo said Jan. 31 that the rate increase will attract more foreign portfolio investment to Colombia, fueling currency gains and hurting farm exports. He called for dollar purchases to offset the trend, a sentiment echoed by flower and banana exporters.

Luis Carlos Villegas, the head of Colombia’s biggest business association, known as ANDI, criticized the central bank as being “excessively prudent” by raising rates.

Policy makers said in a statement following the rate increase that bank lending is growing, housing prices are at record highs and investors’ inflation expectations have risen.

Foreign Investment

The peso is also being buoyed by foreign direct investment in crude, mining and energy projects. Mining Minister Mauricio Cardenas said Jan. 26 that Colombia will receive about $10 billion in foreign direct investment in these industries this year, similar to 2011 levels.

The central bank ended a yearlong daily dollar purchase program on Sept. 30 after Europe’s debt crisis led investors to dump emerging market assets. No dollar options to control volatility were auctioned since Banco de la Republica announced Oct. 28 it would sell them.

The yield on the government’s 10 percent peso bonds due July 2024 rose one basis point, or 0.01 percentage point, to 7.37 percent, according to the central bank. The bond’s price fell 0.145 centavo to 120.847 centavos per peso.

Earlier today the yield fell to 7.35 percent after a Feb. 4 government report showed annual inflation slowed to 3.54 percent in January from 3.73 percent the previous month. Policy makers target inflation between 2 percent and 4 percent this year.

The central bank will probably keep raising interest rates to keep inflation in check, Barclays Capital Inc. Latin America analysts Alejandro Arreaza and Alejandro Grisanti wrote in a report today.

“Despite this benign inflation print, we still expect Banrep to continue with its monetary tightening,” Arreaza and Grisanti wrote. “We expect inflation to accelerate in coming months, driven by higher food prices and the demand pressures that are likely to start to push up core inflation.”