June 30 (Bloomberg) -- Traders are cutting bets for swings in the Colombian peso on speculation policy makers will put the brake on a rally that’s made the currency the best performer in emerging markets this quarter.
Implied volatility on three-month options for the peso versus the dollar, which reflect expectations for fluctuations over the next three months, dropped 10.7 percent since March 2 to 11.09 percent, data compiled by Bloomberg show. That’s the measure’s lowest level since April 28.
The peso gained 5.7 percent this quarter after foreign direct investment in the first five months of the year jumped to the highest level in at least a decade and interest-rate increases sparked flows into bonds. Finance Minister Juan Carlos Echeverry said yesterday that Colombia will keep fighting against gains to protect jobs at exporters. The peso is within 1 percent of a three-year high of 1,753.2 per dollar reached last month.
“Traders have 1,750 in their head” as a level policy makers will defend, said Felipe Campos, head analyst at Alianza Valores SA brokerage in Bogota. “Volatility drops as the market approaches a psychological level.”
The peso climbed 0.5 percent to 1,770.77 per dollar at 4:10 p.m. New York time. The currency will weaken to 1,795 by year-end, according to the median forecast of 15 analysts surveyed by Bloomberg.
The peso is leading gains this quarter among 25 emerging-market currencies tracked by Bloomberg, bolstered by $4.94 billion in mining and energy investment in the first five months of the year. Colombia is opening up unexplored swathes of the country to expand oil production to as much as 2 million barrels a day in 2020, from 923,000 currently. The oil and mining industries accounted for 86 percent of the $5.78 billion foreign investment in the year through May, the central bank said.
Inflows into stocks and bonds jumped eight-fold to $841 million in the five months through May from a year earlier, following increased demand for the country’s financial assets after Standard & Poor’s, Moody’s Investors Service and Fitch Ratings upgraded Colombia to investment grade this year and the central bank lifted interest rates.
Colombia’s central bank raised the overnight lending rate 1.25 percentage points this year to 4.25 percent from a record low 3 percent as policy makers seek to curb inflation pressures amid accelerating domestic demand.
In a bid to ease the peso’s rally, Echeverry said in April that the government would create an overseas fund with as much as $1.2 billion from dollars bought in the local market through the end of 2011, and forgo repatriating funds from abroad for the rest of the year. Since Sept. 15, the central bank has bought a minimum of $20 million daily in the currency market, and plans to keep up the purchases until at least Sept. 30.
The central bank will probably extend the daily dollar purchases through the end of the year, said Camilo Perez, the head analyst at Banco de Bogota SA.
Central bank general manager Jose Dario Uribe said in a May 27 interview that he was “very satisfied” with the effect of the bank’s dollar-buying program in holding back peso gains.
Press officials at the central bank and Finance Ministry declined to comment.
Policy makers may also seek to limit foreign borrowing, which almost doubled in the first five months of this year, Perez said. Such loans fuel gains in the peso when borrowers bring dollars into the country and buy the local currency.
Overseas loans jumped to $3.9 billion in the year through May, up from $2 billion a year earlier, according to the central bank.
While the costs of imposing controls on investment inflows outweigh the benefits for Colombia at the moment, conditions may change in the future, Uribe said in the May interview.
Comments such as Uribe’s constitute “verbal intervention” and have made it difficult for the peso to advance beyond 1,750 per dollar, said Juan Nicolas Garcia, a currency trader at HSBC Holdings Plc’s Colombia unit.
“The fact that everyone is talking about that level shows that it has worked,” Garcia said. “We’ll see increased pressure from exporters and the government ramping up its verbal intervention” as the peso approaches the key level, he said.
Optimism Greece will avoid a default after the nation’s parliament approved austerity measures may lead to more demand for higher yielding emerging-market assets, including the Colombian peso, said Francisco Chaves, an analyst at Bogota-based brokerage Corredores Asociados SA.
The peso reached a two-week low of 1,797.40 on June 16 as concern about Greece prompted investors to drop emerging-market currencies and seek safer assets such as U.S. Treasuries.
Colombia is unlikely to announce new efforts to curb the peso just because it strengthens past 1,750, Chaves said.
“The government will probably give it more time before announcing new measures,” Chaves said. “A couple of months isn’t enough.”
He forecasts the central bank’s and government’s dollar purchases will push the peso to weaken to 1,800 by year-end.
Rising investment flows into the South American nation will continue to put pressure on the peso to appreciate, according to Flavia Cattan-Naslausky, a currency strategist at RBS Securities Inc. in Stamford, Connecticut. She forecasts the peso will end this year between 1,700 and 1,750.
“There is a political sensitivity” to a stronger peso, said Cattan-Naslausky. “It’s going to be a tough fight.”
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