The Colombian peso’s rally, mirroring the 15% increase seen in Mexico’s peso in 2023, might be drawing to a close.
Analysts from Natwest Markets and BBVA have alerted local media that the currency’s growth has probably stretched too far.
The U.S. is reducing interest rates and adopting a more cautious stance.
Meanwhile, Colombia faces political uncertainties and debates over economic reforms, all contributing to downward pressure on its currency.
Alvaro Vivanco of Natwest Markets expresses concerns about the Colombian peso’s valuation, noting political risks.
He also highlights potential losses from oil price gains as the U.S. dollar strengthens.
Citigroup has withdrawn support for the Mexican and Colombian pesos, citing their underperformance due to growing regional risk aversion.
Over the past year, the Colombian peso benefited from peak interest rates of 13.25% and substantial increases in oil prices, its main export.
However, a halt in President Gustavo Petro’s reform plans has introduced fresh uncertainties.
Moreover, sustained higher U.S. interest rates and rising geopolitical tensions in the Middle East are pushing global investors towards safer assets.
This shift has led carry trade operators to exit developing markets, causing the Colombian peso to weaken over 5% against the dollar from a two-year high.
The Decline of Latin America’s Currency Rally
Talks on pension reforms in Colombia might further unsettle the market and pressure the peso, Alejandro Cuadrado of BBVA warns.
Experts such as Armando Armenta from AllianceBernstein and Bartosz Sawicki from Cinkciarz.pl maintain that the peso could retain some strength.
This optimism is due to recent surges in energy prices and careful fiscal management, even though investor interest may decline.
These ongoing developments highlight a critical period for Latin America’s financial stability.
They emphasize the necessity for strategic economic management to effectively tackle these emerging challenges.