Colombia’s peso fell the most in two weeks after the government and central bank announced measures to ease the local currency’s rally, including extending dollar purchases and reducing import tariffs.
The peso dropped 0.2 percent to 1,844.30 per U.S. dollar at 2:02 p.m. New York time, from 1,840 yesterday. It earlier fell as much as 0.6 percent, the biggest intraday decline since Oct. 19. Colombian markets were closed yesterday for a holiday.
The government said Oct. 29 that it will buy as much as $3.7 billion through the currency forwards market to hedge foreign debt payments. The same day, central bank chief Jose Dario Uribe said the institution will keep buying a minimum of $20 million a day through auctions until at least March 15, two months longer than previously planned. He also left open the possibility of bigger purchases, saying the bank can buy dollars in the market through a local clearing house “at any time.”
“What they are doing is managing expectations, letting the market know that both the central bank and Finance Ministry can intervene discretionally,” said Benito Berber, an emerging markets currency strategist with Nomura Securities Inc. in New York. “All this reduces the chances the peso will strengthen beyond 1,800.”
Finance Minister Juan Carlos Echeverry also said last week that the government will eliminate most tax exemptions on overseas borrowing to reduce the inflow of dollars.
Colombia is among developing countries that are seeking to weaken their currencies to protect their economy against inflows of capital in what Brazilian Finance Minister Guido Mantega has called a “currency war.” The moves come as Group of 20 finance ministers and central bankers last month agreed to avoid weakening their currencies to boost exports and to let markets increasingly set foreign-exchange values.
The peso has gained 10.8 percent this year, the most among Latin American currencies tracked by Bloomberg.
The central bank’s plan to make any extra dollar purchases through a local clearing house instead of local bank dealers will make it harder for traders to track the purchases, Flavia Cattan-Naslausky, a strategist at RBS Securities Inc. in Stamford, Connecticut, wrote in a report today.
“It means Banco de la Republica has greater flexibility to spread out intervention purchases depending on market conditions and potentially increase daily purchases beyond $20 million,” she wrote.
Colombia’s participation in the market for non-deliverable forwards, known as NDFs, will depend on the costs, Public Credit Director German Arce told investors in a conference call today.
Berber said it was unlikely the government will take part.
“Colombia has many more dollars it needs to bring in than what it has to buy locally for external debt payments,” he said.
Echeverry also said at the end of last week that the government will keep $1.5 billion overseas “at least for the first months of 2011” instead of bringing the money into Colombia and converting it to pesos. The amount includes the August and December dividend payments from state oil company Ecopetrol SA.
The government will make up for money left abroad by using regular cash flow and savings, Arce said today.
The government also made changes to its 2011 financing plan, allowing it to reduce next year’s foreign debt issuance by $384 million, Echeverry said.
Still, should the Federal Reserve announce plans tomorrow to purchase U.S. government debt to spur growth, pressure on the peso to strengthen will remain, according to Berber.
The Fed may buy at least $500 billion of U.S. bonds in an unprecedented second round of unconventional monetary easing, according to economists surveyed by Bloomberg.
“There’s not much Colombia can do to stop the peso from gaining” under those circumstances, Berber said.
“The plethora measures that have been introduced across Banco de la Republica and the Finance Ministry nonetheless make us less sanguine on the peso’s ability to rally beyond” 1,785, RBS’s Cattan-Naslausky wrote.
The yield on the nation’s benchmark 11 percent bonds due 2020 rose 10 basis points, or 0.1 percentage point, to 7.10 percent, according to Colombia’s stock exchange.
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