Colombia Peso Set to Drop as Rally Prompts Central Bank Concern

By Andrea Jaramillo

July 28 (Bloomberg) -- Colombia’s peso, the world’s best- performing currency in the past four months, will weaken by year-end as the central bank’s commitment to “carefully monitor” the rally discourages investors from betting on further gains, Barclays Plc and RBC Capital Markets said.

The peso has surged 25 percent against the dollar since March 27, the biggest gain among the 176 currencies tracked by Bloomberg, as a jump in oil, the country’s top export, and rising demand for higher-yielding assets lured international investment to Latin America’s fifth-largest economy.

Policy makers said July 24 they were “aware of the risks associated with the peso’s appreciation” after it strengthened more than they expected. Agriculture Minister Andres Fernandez and exporters such as coffee growers are urging Banco de la Republica to buy dollars to weaken the peso.

The central bank’s “verbal intervention will put an end to the peso’s appreciating trend,” said Jimena Zuniga, a Latin America economist at Barclays in New York. The comments “will cause some concern with investors,” she said.

Zuniga forecasts the peso will slide 5 percent to 2,100 per U.S. dollar by yearend, from 1,994.52 yesterday. Paul Biszko, an emerging-markets strategist with RBC Capital Markets in Toronto, predicts the peso will drop to as low as 2,250 in the third quarter and end the year at 2,150.

The central bank’s attempt to reverse the peso’s gains may fail as rising crude oil prices propel the currency further, said Win Thin, a senior currency strategist at Brown Brothers Harriman & Co. He forecasts the peso may rise to 1,850 by yearend.

Peso to Extend Rally

“Oil is higher, commodities are higher, risk appetite is coming back and people like emerging markets, so the Colombian peso and other emerging market currencies can see values go up toward the end of the year,” Thin said.

Crude oil has jumped 53 percent this year to $68.02 a barrel on the New York Mercantile Exchange. The peso fell 0.5 percent to 1,994.52 yesterday.

Rising political tension with neighboring Venezuela and Ecuador may also derail the Colombian’s peso rally, said Fernando Losada, an economist at Deutsche Bank Securities Inc. in New York.

Venezuelan President Hugo Chavez said July 23 his government may curb commercial ties with Colombia after President Alvaro Uribe announced plans to allow the U.S. to use its air bases for anti-narcotics combat missions. Venezuela is Colombia’s second-biggest trading partner.

‘Commercial War’

Ecuadorean President Rafael Correa this month imposed tariffs on Colombian goods including meat, clothing and machinery, saying the depreciation of the peso earlier this year hurt his country’s economy. Ecuador, Colombia’s third-largest trade partner, uses the U.S. dollar as its currency. Venezuela and Ecuador account for about 20 percent of Colombia’s exports, according to Deutsche Bank.

“The commercial war between Colombia and Ecuador has already started,” Losada said in comments sent by e-mail. If Chavez follows through on a threat to replace Colombian imports with those from other countries, “the impact on the peso could be important,” he said.

Deutsche Bank estimates the peso will weaken to 2,200 in six months, according to a report yesterday.

To contact the reporter on this story: Andrea Jaramillo in Bogota at ajaramillo1@bloomberg.net