Colombian Peso likely to drop by year end

Colombian Peso likely to drop by year end

07-28-2009 13:34

RBC Capital Markets and Barclays Plc believe that investors will lose appetite to invest in assets in Colombia’s Peso, due to the central bank’s obligation to “cautiously observe” the rally of the Colombian currency, which posted the best results of all currencies in the last four months. Colombia’s Peso went up 25% versus the Greenback since March 27, which is the largest increase of the 176 currencies measured by Bloomberg. The rally was caused by a rise in oil prices, Colombia’s main export product, and a result of mounting demand for riskier investments, which attracted global investment to Colombia’s economy, which is mainly based on agriculture.

Appreciation of the Peso

On July 24, policy makers stated that they were “conscious of the risks with relation to the appreciation of the Peso” following a rise which exceeded expectations. Exporters such as coffee cultivators and Andres Fernandez, Colombia's minister of agriculture, are prompting El Banco de la República, the central bank of the Republic of Colombia, to procure Dollars in order to lower the Peso.

Comments by specialists

Jimena Zuniga, an emerging markets analyst at Barclays Capital Research, stated that the vocal intervention by El Banco de la República will end the appreciation of the Peso. The remarks will result in some anxiety among investors, she commented. Win Thin, a currency strategist at Brown Brothers in New York, commented: Emerging market currencies such as Colombia’s Peso will appreciate by year-end on the back of higher commodity and oil prices and as a result of returning risk appetite. The Peso’s rally could be ended by mounting political strain with Ecuador and Venezuela, according to Fernando Losada, an economist for Deutsche Bank Securities Incorporated.

Restrain commercial relations

Hugo Chavez, president of Venezuela, which is Colombia’s second-largest trading partner, stated July 23 that his administration could restrain commercial relations with Colombia, following Colombia’s plans to give the US permission to utilize its air bases for war on drugs missions.

Ecuador’s economy affected

Rafael Correa, president of the Republic of Ecuador, levied taxes on goods from Colombia, inclusive garments, meat and equipment, stating that the decrease in value of the Peso earlier this year affected Ecuador’s economy. The US Dollar is Ecuador’s national currency, while Ecuador is Colombia’s third-biggest trading partner. Figures by Deutsche Bank prove that Ecuador and Venezuela cover approximately 20% of Colombia’s export.

Significant effect

Losada commented that the commercial conflict between Ecuador and Colombia has yet begun. He went on by saying that if Chavez actually substitutes imports from Colombia for imports from alternative nations, the effect on the Peso might be significant. The Colombian Peso will fall to 2,200 in the second half of 2009, according to forecasts by Deutsche Bank.