Colombia’s currency could remain bound to the tight trading ranges it has seen over the past three weeks, pleasing monetary authorities who have been working to prevent excessive strength against the weak dollar.
Despite persistent concerns that the peso is on the verge of strong gains that could spiral out of control and cause serious damage to Colombia’s important export sector, the currency is a mere 2% stronger compared with 12 months ago.
During late-morning trading Tuesday in Bogota, a dollar was fetching COP1,783, making the peso 0.2% stronger on the day. Since Aug. 10, the peso’s closing level has hovered in a narrow range between COP1,766 and COP1,796.
Analysts say a combination of forex intervention by Colombia’s central bank and recent volatility in global markets, which reduces the peso’s appeal, is likely to keep any would-be peso strength muffled for the next several weeks, if not months.
“This lateral trend we’ve been seeing is likely to continue,” said Juan Pablo Viera, a currency trader at Colombia’s biggest brokerage InterBolsa, in Medellin. “The range for the dollar, give or take a few, is between COP1,770 and COP1,800.”
Viera said his brokerage has recently been seeing “important buyers of dollars” each time the peso strengthens toward the COP1,780 mark.
The buyers, he said, are mostly traders working for Colombian banks and other financial institutions. “It’s because of the volatility in global markets. They cover their positions by buying U.S. Treasurys and things like that.”
That’s not to say there’s no risk the peso could make a strong move upward, especially when and if global markets settle down. Colombia has been experiencing a huge increase in foreign investment into its oil and coal sectors, which has flooded the forex market with dollars and kept constant pressure on the peso to strengthen.
But analysts say the government’s dollar-buying efforts in the forex market should continue to help quell any bursts of peso strength from foreign investment flows.
Authorities said in April they were creating a $1.2 billion fund from dollars bought locally as a way to rein in the peso’s gains. Additionally, Colombia’s central bank buys at least $20 million daily in the forex market.
In a report Tuesday, RBS analysts said the government has plenty of local currency with which to continue its forex intervention.
RBS noted that Colombian tax authorities brought in COP47 trillion ($26 billion) during the first six months of the year, a 33% rise year over year. Colombia’s tax haul for the full year 2011 is expected to easily surpass government targets.
The increased tax revenue, RBS said, “reflect the strong cash position of the government in local currency and imply it does not need to sell dollars this year and could even use some of the excess cash to buy dollars.”