Talking Down Colombian Peso Seen Marking Peak: Market Reversal

Talking Down Colombian Peso Seen Marking Peak
Calls to drive down the peso may grow as the currency approaches its 100-day moving average of 1,870.64, according to Banco Bilbao Vizcaya Argentaria SA. Photographer: Scott Dalton/Bloomberg

Colombia’s peso, the best-performing currency in Latin America this quarter, is poised to reverse as policy makers call for a weaker exchange rate, trading patterns show.

The peso gained 0.9 percent last week to a four-month high before depreciating 0.2 percent yesterday to 1,876.5 per dollar. The currency appreciated through its 20-day Bollinger band by the most since July 17 yesterday, signaling a reversal may be imminent, data compiled by Bloomberg show. Stochastic oscillators also show the currency is overbought after gaining 2.5 percent since the end of June as oil prices jumped.

Central bank co-Director Carlos Gustavo Cano said Aug. 1 the peso remains as much as 7 percent above its equilibrium, two weeks after Finance Minister Mauricio Cardenas told business leaders in Medellin that the government of President Juan Manuel Santos is “obsessed” with the exchange rate by wanting to keep it weaker than 1,900. Calls to drive down the peso may grow as the currency approaches its 100-day moving average of 1,870.64, according to Banco Bilbao Vizcaya Argentaria SA.

“We’re starting to get to levels that will generate some resistance,” said Alejandro Cuadrado, a currency strategist at BBVA in New York. “When you go below 1,875, the government starts talking again. The question is how much the government will get involved. The president is already calling for the central bank to maintain rates.”

Colombia’s currency fell 0.3 percent to 1,882.05 today in Bogota.

The central bank cut its benchmark interest rate by 2 percentage points in the nine months through March to 3.25 percent to spur economic growth. On July 26, the bank reduced its growth forecast for 2013 to 4 percent from 4.3 percent.

Nomura’s Call

“Conditions are in place in the economy for the peso to be weaker,” central bank Governor Jose Dario Uribe said in Bogota on Aug. 9 as he presented the bank’s quarterly inflation report.

Mario Castro, an analyst at Nomura Holdings Inc., recommended yesterday that investors increase bets against the peso in the forwards market. Nomura expects the currency will weaken to 1,960 per dollar at the end of this year and 2,100 at the end of 2014. The 8.8 percent rise in oil prices that bolstered the peso during July is ending and faster U.S. economic growth may prompt the U.S. Federal Reserve to scale back the unprecedented stimulus that has buoyed demand for emerging-market assets, Castro said in a note to clients.

Colombia’s oil industry has attracted record levels of foreign investment over the past decade, increasing output to more than 1 million barrels per day this year. Crude represented more than half of the Andean nation’s exports in 2013, according to data from the central bank.

‘Less Attractive’

“The conditions are set for a reduction of inflows into the currency,” Castro said in a phone interview from New York. “We don’t think productivity in the oil sector will keep increasing at the pace it has for the past five years and the likelihood is that oil prices will be stable or decline, so Colombia’s terms of trade will be less attractive.”

The peso is likely to hold on to its gains until next month, said Gustavo Arteta, a currency strategist at UBS AG in Stamford, Connecticut.

“The government is caught between a rock and a hard place,” he said. “It wants the peso to weaken, even the central bank does, but it has to balance that with the complaints from the agricultural sector about the cost of imports. So far the government has been absent.”

He expects it to trade in a range of 1,850 to 1,890 for the rest of August.

Bollinger Band

Colombia’s peso is still trading weaker than its three-year average of 1,829.46. It has tumbled this year against 13 of the 17 most-traded currencies tracked by Bloomberg, declining 8.3 percent versus the Mexican peso.

Technical indicators suggest Colombia’s currency may be changing course. At yesterday’s strongest level, the peso was 0.3 percent stronger than the lower limit of the Bollinger band.

Bollinger bands, developed by John Bollinger in the 1980s, are used by technical analysts to identify the turning point in an asset’s trajectory. The limits represent two standard deviations from the 20-day moving average, implying that the likelihood of a currency moving outside the band is rare.

The “k-line” of stochastics, which measures current price relative to highs and lows, fell to 4.79 on Aug. 8, below the level showing the peso is overbought against the dollar. It re-crossed that threshold yesterday, a sign of an incipient reversal. The “k-line” also crossed its five-day moving average.

Cardenas in a May 23 interview said the peso is overvalued and the currency’s “equilibrium” level is 1,900 to 1,950. Since taking office in September, Cardenas has blamed the peso’s strength for the weakness of Colombian industry, which contracted for six of seven months between November and May.

“If the Colombian peso continues its rally, we’d expect authorities to start intervening verbally, but our sense is that the currency is beginning to correct,” Castro said.

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