Colombia’s peso rose the most among major Latin American currencies amid mounting speculation that a tax cut will lure foreign investors and as companies exchange dollars for the local currency to pay taxes.
The peso appreciated 0.3 percent to 1,759 per U.S. dollar. It touched 1,750.50 on Jan. 2, the strongest intraday level since July 2011, and has gained 2.1 percent in the last month.
Foreign direct investment rose 11 percent in 2012 to a record $16.7 billion. The government cut taxes on overseas investors’ earnings from domestic securities to 14 percent from 33 percent as of Jan. 1 to help boost demand and reduce borrowing costs.
“It looks like it’s more speculation of inflows than actual flows coming in that are driving the peso,” said Camilo Perez, head analyst at Banco de Bogota SA, the nation’s second-biggest bank.
Central bank Governor Jose Dario Uribe said Jan. 2 on RCN Radio that the peso is a concern and reiterated that Banco de la Republica will buy a minimum of $20 million a day through at least the first quarter to curb its advance, after printing pesos to buy a record $4.8 billion in 2012.
Agriculture Minister Juan Camilo Restrepo urged the central bank on Jan. 9 to increase dollar purchases to slow the currency’s appreciation, which is making the nation’s coffee, flower and banana exporters less competitive.
The peso may rally to 1,650 in the second quarter, Felipe Hernandez, a Stamford, Connecticut-based economist at Royal Bank of Scotland Group Plc, wrote in a note to clients today. Companies converting dollars to pesos to pay income tax in February, April and June are helping the local currency, according to Hernandez.
“We expect additional but still gradual exchange rate intervention consistent with our forecast for further currency appreciation early in 2013,” Hernandez wrote. Capital controls and “less transparent intervention could be possible at levels close to our target” of 1,650, he wrote.
The yield on Colombia’s 10 percent peso-denominated debt due in July 2024 fell one basis point, or 0.01 percentage point, to 5.43 percent, the lowest since the securities were first issued in 2009, according to the central bank. The price rose 0.042 centavo to 138.292 centavos per peso.
The “search for yield” amid near-zero interest rates in the U.S., Europe and Japan are leading to gains in government peso bonds, known as TES, Perez said. “It’s clear there is a lot of appetite for TES. Yields have fallen strongly across the curve.”