Colombian Peso Rally Seen Over on Dollar Buying: Market Reversal

The Colombian peso’s best monthly rally this year is showing signs of fatigue as policy makers consider whether to extend a record $5.9 billion of foreign-currency purchases to weaken the exchange rate.

The peso’s 2.3 percent gain in September, the biggest advance since December, pushed the currency through its 20-day Bollinger band, suggesting it may be poised to decline. The commodity channel index, the most profitable technical indicator over the past year, also signals the currency is overbought, data compiled by Bloomberg show.

While President Juan Manuel Santos urged the central bank to let its daily dollar-purchase program expire this month, strategists at Bank of America Corp. and Royal Bank of Scotland Group Plc say policy makers may opt to buy more dollars to build up foreign reserves and stem the peso’s advance. Even without the intervention, the largest current-account deficit since 1999 and the lowest interest rate among seven Latin American nations tracked by Bloomberg may be enough to weaken the peso, says RBS.

“The central bank will want a weaker peso,” Ezequiel Aguirre, a strategist at Bank of America in New York, said in a phone interview yesterday. “We certainly expect the peso to underperform other emerging-market currencies.”

The peso strengthened 0.1 percent today to 1,890.18 per dollar, heading for its biggest monthly advance since it jumped 2.7 percent in December. The currency reached a one-month high of 1,880.72 on Sept. 19, a day after the Federal Reserve’s surprise decision to maintain its $85 billion of monthly bond purchases, which have created demand for higher-yielding, emerging-market currencies.

Dollar Purchases

Colombia’s peso was the second- best performer among seven Latin American currencies tracked by Bloomberg this quarter, gaining 1.7 percent against the dollar. Chile’s peso posted the biggest gain, at 2.1 percent.

Dollar purchases by Colombia’s Banco de la Republica this year have already surpassed the $4.8 billion it bought in 2012 as policy makers seek to stem the peso’s 19 percent rally since the end of 2008. A more expensive peso undermines Colombia’s coffee and flower exporters. Central bankers are scheduled to decide whether to continue with the intervention program at a policy meeting on Sept. 27.

Mario Castro and Benito Berber, strategists at Nomura Holdings Inc. in New York, recommended Sept. 23 that their clients exit a bet that the peso will rise further, saying the central bank may extend its dollar purchases through December.

Foreign Reserves

“The central bank probably will want to continue accumulating international reserves, which are a bit low relative to other countries,” said Castro, who expects the peso to weaken 3.7 percent to 1,960 per dollar by year-end.

Officials in the central bank’s press office declined to comment on its dollar purchases.

At $39 billion, Colombia’s foreign reserves represent about 10 percent of its gross domestic product, the lowest proportion in Latin America after Argentina and Venezuela, according to data compiled by Goldman Sachs Group Inc. That compares with 16 percent in Brazil and 19 percent in Mexico.

This month’s rally pared the peso’s loss this year to 6.5 percent. The central bank’s intervention has helped weaken the currency, which reached a 17-month high of 1,750.50 on Jan. 2, data compiled by Bloomberg show.

Quicker Growth

Santos said in a Sept. 16 interview that the central bank should stop buying dollars as the peso slides toward a level the Andean nation “can live with.” He specified an acceptable rate as “between what we have right now and 2,000 or something.”

A government report three days later showed that Colombia’s economic expansion quickened to an annual 4.2 percent in the second quarter, the most in a year and up from 2.7 percent in the prior three months.

The peso breached the lower limit of its 20-day Bollinger band on Sept. 20 and remained above that level today, data compiled by Bloomberg show.

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 peso’s commodity channel index has stayed below minus 100 since Sept. 10, which technical analysts interpret as meaning it’s overbought, Bloomberg data show. The gauge has fallen to 109 from as high as 138 on Sept. 13, suggesting the peso rally is losing momentum.

Best Strategy

Investors who followed the index to trade the peso would have returned 10 percent over the past year, making it the most profitable of 23 technical indicators followed by Bloomberg.

Flavia Cattan-Naslausky, a strategist at RBS, said Colombia’s deteriorating current-account deficit and low interest rates are weighing on the peso.

The shortfall in the current account, the broadest measure of trade, widened to 3.5 percent of GDP as of March, the most since 1999, according to data compiled by Bloomberg. That leaves the country more reliant on foreign capital to fuel its growth.

Colombia’s central bank has kept its benchmark interest rate at a two-year low of 3.25 percent since March, making it less profitable to hold peso-denominated assets and helping weaken the currency. The rate compares with 9 percent in Brazil and 5 percent in Chile, according to data compiled by Bloomberg.

“You have lower interest rates and a currency policy that is effectively weakening the peso,” Cattan-Naslausky said in a phone interview yesterday from Stamford, Connecticut. “I would be inclined to sell the peso to buy other Latin American currencies.”

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