Colombia’s peso fell from a two-year high on speculation the Central Bank will announce measures to stem the local currency’s rally.
The peso dropped 0.3% to 1,811.75 per U.S. dollar at 2:45PM New York time, from 1,807 yesterday. It earlier rose to 1,795.85, its strongest level since August 8, 2008.
President Juan Manuel Santos said last week the Central Bank is studying measures to ease the peso’s “worrisome” rally, which has led it to jump 12.8% this year, the best performance among world currencies tracked by Bloomberg. Banco de la Republica may announce measures to ease the peso’s gains during the August 20 monetary policy meeting, according to Guillermo Puentes, head trader at Banco de Comercio Exterior de Colombia SA, known as Bancoldex.
“People are waiting to see what will come out of the meeting,” said Puentes. “As long as flows continue to come in, there’s not much the Central Bank can do to stop” the peso’s appreciation.
Policy makers may decide to restart daily dollar purchases that expired in June, or follow Brazil’s strategy by carrying out “unannounced auctions without any pre-determined purchase amounts,” RBS Securities Inc. Latin America currency strategist Flavia Cattan-Naslausky wrote in a note to clients today.
“Increase the Effectiveness”
“This makes the market less one-sided and could increase the effectiveness of stemming the pace of appreciation,” she wrote.
The Central Bank purchased $20 million a day between March 3 and June 30 to curb a rally policy makers said left the peso “misaligned.”
In a report earlier this week, Cattan-Naslausky said Banco de la Republica may also boost coordination with the Treasury to moderate the pace of dollar sales while it is unlikely the bank will cut the overnight lending rate.
Bets the Central Bank will announce measures to stem the peso’s gains are leading investors to sell the local currency when it strengthens beyond 1,800, according to Puentes.
Santos met with policy makers August 12 after urging them in an August 11 speech to be “more creative, more bold” in stemming gains in the currency. His comments that he “will try and convince” the central bank’s board to ease gains in the peso echo former President Alvaro Uribe’s calls for the Central Bank to find a “solution” to curb the rally, which he said caused exporters to cut jobs.
Santos said an independent Central Bank is important and it’s also key for the bank and the government to maintain “a dialogue and permanent collaboration.”
The yield on the benchmark 11% bonds due 2020 fell seven basis points, or 0.07 percentage point, to 7.15%, according to Colombia’s stock exchange. The bond’s price rose 0.597 centavo to 126.734 centavos per peso.