Colombia Peso Sinks Most in Month as Central Bank to Buy $20 Million a Day

Colombia’s peso fell the most in a month after the central bank said it would buy at least $20 million a day to stem a rally that pushed the currency to the world’s biggest gain this year.

The currency slid 0.9 percent to 1,807.28 per dollar at 2:09 p.m. New York time, from 1,790.35 yesterday. Earlier it dropped 1.3 percent, the biggest decline since Aug. 12. The drop pared the peso’s jump this year to 13.1 percent, the best performance among all currencies tracked by Bloomberg.

Resuming a dollar purchase program it had carried out earlier this year, the central bank said in a statement it plans to buy dollars daily for at least four months starting today to bolster foreign reserves. Central bank chief Jose Dario Uribe said Aug. 20 that the bank would make the purchases to ease gains in the peso when “appropriate,” heeding a call from President Juan Manuel Santos last month for policy makers to take “bold and creative” action.

Banco de la Republica “finally announced an intervention and that’s pushing declines in the peso,” said Daniel Velandia, head analyst at Bogota-based brokerage Correval SA. “Now it becomes a game with the market to see how much the central bank buys. Depending on how aggressive it is, if it buys more than $20 million, we will see a weaker peso.” He forecasts the peso will slide to 1,900 within two weeks.

The central bank acquired $20 million a day between March 3 and June 30, or $1.6 billion in total, to curb a rally policy makers had said left the peso “misaligned.” It bought $19.9 million today, according to the bank’s website.

Japan, Brazil Intervention

The strong peso is threatening to derail Santos’s pledge to boost growth to 6 percent within two years from a government- projected 4.5 percent this year and add 2.4 million jobs to lower a 13.3 percent unemployment rate that is the highest in Latin America.

The Colombian Agriculture Society said in a statement last month that the peso’s rally is causing “ruin in the countryside,” while the Flower Growers Association has asked the bank to step up interventions to save hundreds of jobs.

Japan said it sold yen in the foreign-exchange market for the first time since 2004 after a surge in the local currency drove it to its strongest against the dollar in 15 years. Brazil also stepped up dollar purchases to ease gains in the real, a sign that intervention against a weak dollar is spreading globally.

‘Test’ the Bank

Brazil’s central bank has held two daily auctions to buy dollars since Sept. 8 after buying $18.6 billion in the first eight months of the year, up from $7.3 billion purchased in the year-earlier period.

With today’s announcement, “I doubt the market will try and test the central bank,” said Benito Berber, a currency strategist with Nomura Securities Inc. in New York. “If it does, the size of the intervention can quickly increase and it can be sustained for rather a long time.”

Berber forecasts the peso will remain weaker than 1,800 with declines also “depending on global risk perception,” he said.

“The intervention program in general and the discretionary component in particular, will prevent the Colombian peso from resuming appreciation at a significant pace,” Barclays Capital analysts Roberto Melzi and Jimena Zuniga wrote in a report today. “However, although we expect a more gradual appreciation in the coming months due to the intervention we continue to see value in the Colombian peso on fundamental grounds.”

Peso Forecast

Barclays revised its six-month forecast on the peso to 1,750 from 1,700 previously, recommending investors “add exposures in weakness,” according to the report.

Colombia will attract about $10 billion in foreign direct investment this year, the government has said. The nation received $7.2 billion of foreign-direct investment in 2009 -- of which 80 percent went into oil, coal and mining -- after a record $10.6 billion the previous year, according to the central bank.

Speculation the South American nation will be raised to investment grade has lured foreign investors to the country’s financial assets, also helping fuel the peso’s rally which pushed it to a two-year high earlier this week.

Moody’s Investors Service, which rates Colombia’s foreign debt Ba1, or one level below investment grade, raised the country’s credit rating outlook last week to positive from stable. Standard & Poor’s Ratings Services also raised its outlook to positive in July. Colombia is rated BB+, or one level below investment grade, by S&P and Fitch Ratings.

‘Ample’ Capacity

Banco de la Republica’s Uribe said after the Aug. 20 monetary policy meeting that while the central bank has “ample” capacity to intervene, policy makers also analyzed different tools the bank could use to take pesos out of the economy so that “should the bank intervene in the future, it will have more capacity to do so without compromising the inflation target.”

Annual inflation was 2.3 percent in August, within the central bank’s 2010 target of between 2 percent and 4 percent. Inflation may end this year and next year at around 3 percent or less, Uribe has said.

Policy makers will likely announce measures to take pesos out of the economy to avoid stoking inflation, according to Berber.

“In order to anchor inflation expectations, it’s very important that Banco de la Republica and the Finance Ministry be very transparent on how the intervention will be sterilized,” said Berber. “Given the pace of economic growth, hurting inflation expectations wouldn’t be desirable.”

The yield on the benchmark 11 percent bonds due 2020 fell eight basis points, or 0.08 percentage point, to 7.24 percent, according to Colombia’s stock exchange. The bond’s price rose 0.621 centavo to 125.830 centavos per peso.

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

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