Central bank intervention has helped keep Colombia’s currency from getting too strong against the dollar, but divine intervention — in the form of torrential rainfalls — clearly deserves some of the credit.
Colombia’s peso is nearly 2% weaker in February and within earshot of where it began the year, trading recently as weak as COP1,891 for $1 Thursday. This despite forecasts by many traders at the start of 2011 that by now the peso would be strengthening toward COP1,750 due to continued heavy inflows of foreign direct investment into Colombia.
Analysts say rising inflation in Colombia, a direct result of six months of lashing rains that wiped out farmers’ crops and caused food prices to soar, is one of the main factors for the peso’s recent stability and even modest weakness.
Consumer price inflation is up 1.56% over the past two months alone, bringing annualized inflation to a 19-month high of 3.4%. That means inflation, which weakens a currency’s value, is now in the top range of the central bank’s 2011 inflation target of 2% to 4%.
What’s more, the bank hasn’t responded to the rising inflation by raising interest rates, which remain at a historical low of 3%. Bank Chairman Jose Dario Uribe says the uptick in prices is a “temporary” supply-side problem and that once the rain goes away, so too will the higher inflation.
The bank’s apparent lack of concern over the higher prices is what has some investors rattled, analysts say.
“The market is a little nervous about the inflation, specifically the 3.4% 12-month figure … and the bank seems to be rather dovish about it all,” said Win Thin, currency strategist at Brown Brothers Harriman in New York.
In a policy statement two weeks ago, the bank said it’s only going to raise interest rates if inflation remains a problem–which it doesn’t expect–or if the economy continues to grow as forecast.
The government expects the economy to grow 5% this year. But third-quarter growth was a lower-than-forecast 3.6% and some analysts worry growth could continue to suffer from the rains and floods, which beyond wiping out crops also killed hundreds of people, left thousands homeless and destroyed bridges and highways.
The government says recovery and reconstruction will cost upwards of $5 billion. Coal and oil producers in Colombia have cited the rains for lower-than-expected output in recent months.
With that in mind, analysts don’t expect Colombia’s central bank to hike rates until sometime in the second quarter of this year.
Meantime, other factors are also keeping a lid on peso strength.
The central bank set up a policy last year, amid a surging peso, that each day through mid March it would buy $20 million in U.S. currency in the forex market to prevent peso strength.
Also, Latin American currencies in general haven’t outperformed in 2011 the way they did over the past couple of years, and analysts say Colombia’s peso is part of that trend.
Despite the higher inflation and the bank’s daily dollar purchases, some currency strategists feel the peso’s on the verge of trending upward again.
“This [modest peso weakness] isn’t going to last,” said Po Jeng, who analyzes currencies at Colombia’s InterBolsa brokerage in Bogota. “By the end of this week or perhaps next week, the focus will once again shift to foreign investment flows into Colombia, and you’re likely to see the peso gain.”
She expects the peso to strengthen to around COP1,800 for $1 by the end of 2011.
Foreign direct investment shot up 37% last year to $9.4 billion and could top $10 billion in 2011 as oil companies and other big-money investors pour dollars into this Andean nation.
By Dan Molinski, Dow Jones