Trading the Colombian Peso

In 2012 the Colombian peso out distanced all other currencies versus the US dollar. Now trading the Colombian peso has to do with anticipating when the currency will hit bottom versus the dollar and when the price of crude oil will come back up. In December Bloomberg reported that the peso leads global losses due to the massive fall in oil prices.

Colombia’s peso fell to a five-year low and led losses among world currencies as the price of crude oil, the Andean nation’s biggest export, sank to a five-year low.

The peso sank 2 percent to 2,396.69 per dollar at the close in Bogota, the weakest since April 2009. The drop was the biggest among 31 major currencies tracked by Bloomberg. The peso has tumbled 12 percent in the past month.

That was when Brent crude fell below $65 a barrel. Today Brent crude contracts for March 2015 trade at $56.09 a barrel and one dollar buys you 2,406.5 Colombian pesos. The last months have been active for those trading the Colombian peso. What does the future hold?

A Weaker Peso Favors Colombian Exports

Crude oil is priced in US dollars. But items manufactured or grown in Colombia are denominated in now-weaker pesos and sell more cheaply in world markets. Reuters reports the Colombian finance minister saying he is comfortable with the weakened peso!

Colombian Finance Minister Mauricio Cardenas said on Thursday that the peso, which has lost a fifth of its value against the U.S. dollar in 12 months, was trading at an “adequate” level, one that will boost local manufacturing.

“The dollar’s current level is one we consider adequate. It seems to us it is a level that will enable many Colombian companies not only to export, but also very importantly, Colombians will start to favor national products because imports will become very expensive,” he said.

For the time being the Colombian central bank is not taking any measures to raise the value of the peso such as buying pesos with their dollar reserves. And, the price of oil has fluctuated before taking the Colombian peso with it. Thus it can be expected that when oil starts to recover so will the peso.

Raising Taxes to Balance the Budget

Colombia’s current budget was based on the assumption of $100 a barrel oil. As oil revenue has fallen so have tax revenues. The nation has to increase taxes to cover expenses. The Bogota Post analyzes how the Colombian peso is hit hard by the fall in oil.

This situation causes a number of problems. Firstly, the dramatic drop in the price of oil means that Colombia’s original 2015 budget is no longer worth the paper it was written on. The country made assumptions on earnings based on a price of oil which no longer applies. This has been adjusted for by raising taxes to plug the budget deficit, but analysts are already saying a further tax hike may be necessary if the price of oil continues to fall.

Secondly, although Colombia is not an oil economy in the same way as, for example, Venezuela, oil still accounts for a large portion – over 50 percent – of the country’s exports. If prices stay low in the long-term, the country will be forced to adjust the peso and cut public sector spending to make up for the sudden loss of income.

While Colombia muddles through with a weaker peso traders may expect to see the COP recover, as it always does, when the economy improves and the price of oil rises.