Colombia’s peso changed course again on Friday, weakening to 1,901.3 to the dollar on after a surprise rally to a 2-month low of 1,872.91 last week.
Colombia’s central bankers, Finance Minister Mauricio Cardenas and President Juan Manuel Santos have become obsessed with keeping the peso weak in the face of a flood of foreign investment, a shrinking manufacturing export sector and a moribund agriculture industry.
The Colombian government has promised to help pull manufacturing industries back into vitality. Right now, companies like automobile manufacturer Chevrolet are seeing sales fall. An erosion in industrials is one reason why the fall down to a 2-month low stoked some worry among Colombia’s officials and analysts.
“I was not expecting it,” Foreign Exchange Analyst Andres Fletcher at Bogota-based brokerage Ultrabursatiles told Colombia Reports.
“A month ago, I was not expecting a movement to 1,870. I was thinking a correction to 1,900 was normal, but no more than that.”
“From now on, I think [the rate] should go up a little bit more… external conditions in the local fixed income market are helping to weaken the peso.”
Fletcher believes that the rate could move up to 1,940 or possibly 1,950 by the end of the year. If it does, it will be in the ideal range the government has set for the currency.
The peso’s long-term pace of depreciation, according Fletcher, could turn manufacturing around by the first quarter of 2014 or even the end of 2013.
In 6 out of the past 7 months Colombia’s industrials have contracted. Earlier this year, exporters in agriculture sectors have protested falling prices in a sea of rising costs.
“All of the efforts that the government made to push the peso up were made for the industrial sector and the agriculture sector. Clearly the exchange rate should help them.”
The problem here, explained Fletcher, is that the manufacturing and agriculture sectors are largely exposed to the risks that come with the peso. Manufacturers cannot hedge against risks with derivatives.
One of the most important guides of the peso’s course is Colombia’s oil productivity. Investors, according to Bloomberg, don’t see Colombia’s oil production hitting the same levels it has over the past 5 years. That could steer the peso toward a weaker course.
Analyst Mario Castro of Nomura Holdings, Inc. told Bloomberg that a fall in oil prices and the likelihood of the Fed ending its quantitative easing program have reversed demand for the emerging market currency.
In other words, global investors are putting less money into assets of emerging markets like Colombia.
Despite the sudden rally in early August, Finance Minister Mauricio Cardenas and other government officials have been generally quite about an intervention move to change the course of Colombia’s currency.
According to Bloomberg, Cardenas believes that the peso is still overvalued on the market.
The last time the central bank of Colombia intervened with the currency was in March of this year, when President of the central bank Jose Dario Uribe, and his team, decided to pull down interest rates to a regional low of 3.25%.
- Interview with Andres Fletcher, FX Analyst (Ultrabursatiles)
- Colombian Peso to US Dollar data (Google Finance)
- Talking down Colombian peso seen marking peak: Market Reversal (Bloomberg)