Colombia's central bank recently took steps to halt the peso's rally, including a surprise decision to keep interest rates unchanged at 12% on July 31, defying economist expectations for a hike. This move, combined with monthly put option auctions to buy dollars when the peso falls below its 20-day moving average, was intended to weaken the currency. The first auction, capped at $400 million, was scheduled for the following Monday, with officials noting similar methods added about $1.5 billion to foreign reserves in 2024.
The peso's strength has been attributed to a significant carry trade, where investors borrow in low-yield currencies and invest in Colombia's high 12% interest rate assets. Elevated crude prices and a market-friendly presidential election outcome also contributed to investor confidence. However, this appreciation created difficulties for exporters, as each dollar they earned translated into fewer pesos at home, making it harder to cover expenses.
Analysts reacted sharply to the central bank's strategy. Wells Fargo's Alvaro Vivanco stated, "This is how you weaken your currency: No hikes when everyone was expecting it and dollar buying." Brendan McKenna of Societe Generale predicted the peso would open sharply weaker, with depreciation continuing as long positions unwind. He also suggested the central bank was becoming "uncomfortable with the pace of the peso's appreciation." Despite these interventions, the peso had already closed on July 31 at levels not seen since 2019, and the rally continued, indicating the central bank's struggle to control its appreciation.
The central bank's board member Laura Moisá noted that policymakers are evaluating the impact of these interventions, including the finance ministry's purchases of local debt to reduce interest costs. This situation highlights a broader regional trend, as Uruguay and Costa Rica have also intervened to cool their currencies this year, with Uruguay cutting rates and Costa Rica intervening for the first time since 2015, all in response to strong currency appreciation impacting inflation targets and exporters.
