The Colombian peso has been roiled by a dose of fear in recent weeks spurred by discretionary government dollar purchases in the exchange market.
The peso has weakened since the government unveiled its plan to buy $1.2 billion in the forex market until the end of the year. The announcement, made last month by Finance Minister Juan Carlos Echeverry, was accompanied by one important warning: the government wouldn’t specify how much it would buy on a daily level.
Since then foreign exchange operators have seen the government come into the market to gobble up dollars, but no one has a clear picture of how much the government has purchased. Echeverry on Tuesday confirmed that the government had indeed been intervening in the spot market but declined to give a figure for the total purchases.
Speculation by traders is that the government’s daily operations have ranged from $1 million to $30 million.
The discretionary purchases have alarmed some traders that were betting on a stronger peso. Many are now anxious that unpredictable dollar purchase by the government could easily hurt their positions.
“The government’s plan is really scaring off some traders” that wanted to bet on a stronger exchange rate, said Munir Jalil, chief economist at Colombia’s Citigroup unit.
The government’s dollar purchases have helped rein in the peso, which had been appreciating strongly against the dollar. On Tuesday, the peso closed at COP1,831.90 against the dollar from COP1,826.75 a day earlier.
Still, the strategy has also been boosted by a wave of risk-aversion in international markets that has weakened several currencies from emerging economies. The recent decline in commodity prices could also have a strong impact in Colombia, which relies on exports of oil and coal.
“The real test for the government’s strategy will be when there’s more appetite for risky assets,” said Jalil.
The weaker peso is a much welcome relief for President Juan Manuel Santos, who has faced growing pressure from exporters when the peso nears the COP1,750 mark.
Investors bullish on the peso, however, continue to cite the massive inflows of foreign direct investment, geared at the oil and mining sector, that are expected continue to strengthen the peso and challenge the government.
Indeed, other measures may still be necessary to keep a leash on the currency.
The central bank has some ammunition. It has been buying $20 million daily in the spot market and has ample room to hike its purchases. It may also decide to extend those purchases before their expiration on June 17.