The takeaway from the recent price action in the Colombian peso seems to be that oil prices continue to overpower interest rates and FX intervention as the currencies main driver. The peso has been by far the worst performing major EM currency so far this month. It is down over 6% against the dollar, almost twice as much as the South African rand over the same time period.
In its late October meeting, the Colombian Central Bank (Banrep) surprised the markets with a 50 bp hike to 5.25%, compared with expectations for a 25 bp increase. The decision was driven by the weaker currency and the effects of the El Nino on food prices. Around the same time, Banrep added some new FX measures to its arsenal. The bank started a new FX options program to support the peso, where it will auction $500 mln whenever the peso rises by 7% or more than the 20-day moving average. The peso reacted well initially to these moves, gaining 3.4%, the biggest single day gain in five years when markets re-opened after the holiday on November 3.
Since then, however, the peso has weakened against the dollar in every one of the nine sessions. The main driver seems to be oil prices. The graph shows the peso together with inverted price of the front contract for WTI. The correlation (on a rolling 60-day basis) stands near -.66, which is fairly high.
Aside from the well documented dependency of Colombia’s budget on oil prices, the current account has also been in focus. The Q2 deficit improved considerably compared with Q1, narrowing to -$4.3 bln from -$5.1 bln. On a year-on-year basis, however, the numbers look very poor.
- Exports of goods fell 31.2% to $10.3 bln from $15.0 bln a year ago
- Imports of goods fell 16.4% to $12.7 bln vs. $15.2 bln a year ago
- Foreign direct investment was $3.9 bln vs $5.0 bln a year ago, driven by a collapse in investment in the oil sector
At this point, we don’t see any indication of a decoupling between the peso and oil. Unlike the case of Mexico, for example, Colombia does not seem well-positioned to take advantage of the weaker peso to attempt to rebalance the economy away from a commodity exporter. As such, the negative impact of the weaker peso on inflation outlays it competitive, leaving us still bearish on country’s asset prices.
MSCI Colombia is down -39% YTD, and compares to -14% for MSCI EM. Until oil prices stabilize, we see further underperformance in equities. USD/COP is likely to revisit the August all-time high near 3266 in the coming weeks. High inflation and more rate hikes are likely to keep Colombian local currency bonds in the underperforming camp too.