Colombia Peso Rebound Seen on Dollar Buying End: Market Reversal

Colombia’s peso is poised to rebound from its biggest tumble in a year as policy makers consider whether to extend a dollar purchase program that ends this month, trading patterns show.

The 14-day relative strength index of the exchange rate rose yesterday to 83.3, the highest since September 2011, as the peso tumbled 3.1 percent against the dollar in two weeks, the most of any South American currency tracked by Bloomberg. A level above 70 implies an imminent reversal. The currency broke through 1,900 per dollar yesterday for the first time in 16 months, prompting Finance Minister Mauricio Cardenas to declare the depreciation “a great achievement.”

Colombia’s central bank has bought at least $30 million of U.S. dollars a day since Jan. 28, helping to weaken the peso 6.2 percent, and sold 8 trillion pesos ($4.2 billion) of its 10 trillion peso allowance of bonds to mop up extra local currency. The dollar purchase program is scheduled to end on May 31 and policy makers will decide whether to extend, reduce or halt the intervention.

“If they don’t extend, or do it for less time, we could get some correction to the move we’ve had in the last few days,” said Camilo Perez, chief economist at Banco de Bogota, the nation’s second-biggest bank. “The probability they don’t extend is high, it would be perfectly reasonable not to, and the technicals suggest the market is vulnerable.”

Limited Period

Banco de Bogota expects the central bank will decide to extend the purchases for a limited time period, Perez said. Policy makers can only sell a further 2 trillion pesos of bonds to sterilize its intervention and the currency is below where it was when the bank last announced dollar purchases in January, he said.

The peso rose today, gaining 0.3 percent to 1,892.40 per dollar as of 1:44 p.m. in Bogota, ending an eight-session losing streak. It slid as far as 1,902.67 yesterday. The currency has closed weaker than its 20-day Bollinger band for the last five sessions, indicating it is due for a reversal.

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 recent drop in the peso has spurred speculation that the central bank may suspend its intervention, according to Alejandro Cuadrado, a strategist at Banco Bilbao Vizcaya Argentaria SA in New York.

“There’s talk already about the end of the central bank intervention,” he said. “Our base case is still for three months, but I’d be really surprised if they did more and they could stop. People are moving towards no renewal.”

Best Performance

The peso appreciated 16 percent in the three years through the end of 2012, the best performance among the 24 emerging-market currencies tracked by Bloomberg, as army victories over guerrillas opened up swaths of countryside to overseas investment in mining and oil and bolstered consumer confidence. Foreign direct investment reached a record $16.7 billion last year.

The government has repeatedly tried to weaken the peso, arguing that its strength is hurting Colombia’s industry and agriculture by making exports uncompetitive. President Juan Manuel Santos said as recently as April 15 that 1,900 per dollar marks the equilibrium for the currency. The same month, Finance Minister Mauricio Cardenas said changes to pension fund rules would boost demand for dollars by about $4 billion this year.

He called a strong currency the “mother of all problems” on May 17 after data showed industrial output fell 11.5 percent in the 12 months through March even as the central bank lowered the benchmark interest rate to 3.25 percent, the lowest level in two years. The economy expanded 3.1 percent in the fourth quarter from a year earlier, the slowest pace in the Andes region.

‘Great Achievement’

“We’re not going to sit with our arms crossed, but we think it’s a great achievement to be at 1,900 per dollar,” Cardenas told reporters in Bogota yesterday after the markets closed.

The currency has dropped 6.7 percent this year, the worst performer among emerging-market currencies tracked by Bloomberg after the South African rand’s 14 percent tumble.

“This is what the market calls the ‘Cardenas rate,’ the rate he has mentioned since the beginning of the year,” said Diego Donadio, a strategist at BNP Paribas SA in Sao Paulo. “We’re there.”

Donadio on May 28 took profits on the recommendation he had to bet on the peso falling against the dollar because of the possibility the central bank stops buying U.S. currency.

Options Premium

The premium for three-month options granting the right to sell the peso against the U.S. dollar relative to those allowing for purchases was 2.86 percentage points yesterday, up from 1.99 percentage points at the end of April, 25-delta risk reversal rates show. A so-called Z-score of 3.7, the highest among 30 most-traded currencies, means the premium is more than three units of standard deviation from the 20-day average.

In these and other forms of technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a currency, security or index.

“The government is happy with the peso at this level and one assumes so is the central bank,” said Jorge Cardozo, an analyst at Corredores Asociados brokerage in Bogota who expects a suspension of dollar buying.

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