Colombia currency, the most devalued in Latin America
With a devaluation of 11%, the Colombian peso was one of the currencies that lost most value against the dollar during 2019, without taking into account the quotations of the bolivar that practically disappeared from financial operations. This behavior is related to the profound uncertainty that the exchange market has presented in the last 12 months.
An analysis of this situation by Bancolombia indicates that one of the main financial trends in Latin America during 2019 was the strong pressure to which its main currencies were subjected. This occurred because of an environment of global uncertainty, as well as the trade war between the United States and China and concerns about governance and social unrest in several countries.
As a result, Latin American currencies depreciated by 9.8% last year, and the Colombian peso by 11%. However, during the last month of 2019 and for most of the first few days of 2020, the region's currencies, particularly the Chilean and Colombian pesos, managed to reverse some of the negative behaviours that had been seen up to the end of November.
"In the case of the peso with respect to the dollar, the correction from its maximum level amounts to $240. Given the size of this adjustment, it is inevitable to ask whether the trend of recent weeks may be the prelude to a much more pronounced recovery phase of our currency or if, on the contrary, the behavior we have witnessed in recent weeks has become extinct.
This concern is relevant, since the average of the analysts consulted by Bloomberg expects the dollar, measured through the DXY index (Dollar Index Spot which compares the behavior of the US dollar daily against the other six main world currencies: the euro, the Japanese yen, the pound sterling, the Canadian dollar, the Swedish crown, and the Swiss franc), to fall this year by 1.7%," the analysts say.
Given the historical relationship between DXY and emerging exchange rates, this expectation could be interpreted as a sign of strengthening the latter. The researchers note that "to answer this question, we return to an important observation we made a few weeks ago about the Colombian peso. We said that our country's currency has been increasingly used as a vehicle for cross-covering the emerging currency exposures of operators such as funds.
We also stated that one of the key reasons for this is that the sensitivity of the peso to dollar movements has increased in relative terms versus its peers. That comment was made at the height of the depreciation. Now that the trend has changed, we believe it is pertinent to refine the calculation of exchange rate sensitivity measures.
Financial analysts say that "in particular, we want to determine whether the beta (the term by which this sensitivity is usually referred to) of the peso and its peers is different when the dollar is appreciating than when it is losing value. To that end, we made a robust estimate on moving samples of monthly changes from January 2009 to date.
First, we note that the sensitivity of the main Latin American currencies to dollar appreciation is high and significant, as would be expected given the performance observed in 2019. In addition, as we stated in November, the Colombian peso is currently exhibiting the highest beta in the region at times when the U.S. currency is strengthening.
They argue that "however, when we analyze only the periods of weakening of the dollar the reaction changes substantially: the value of the peso's beta and other similar currencies (with the exception of the Chilean peso) is reduced, to the point that the estimators become insignificant. In other words, the evidence shows that a depreciation of the dollar does not imply an advance for Latin American currencies. This means that the high beta of the Colombian peso is asymmetrical: it operates when the dollar advances, but tends to fade when it retreats.
The report states that "in the face of the concerns we raised, the above results support the view that the space for appreciation of our currency both in the short term and over the coming year is limited. This implies that the course that has taken place since December will not be perpetuated. In fact, if the scenario contemplated by international analysts materializes, our analysis suggests that a moderate weakening of the dollar will not have a major impact on the performance of the Colombian peso".
"The perspective proposed corroborates that the level of the current exchange rate, close to $3,300, is consistent with the fundamentals of the Colombian economy. In particular, the pronounced current account deficit exhibited by Colombia, which for this year will border 4.5% of the GDP, represents a fundamental barrier that will prevent an additional recovery of the local currency. For all these reasons, we reaffirm that our perspective that in 2020 the dollar will trade on average at $3,310", says
On the other hand, for the analysts of Coltefinanciera, this year seems to be better. They point out that "since we began this new year we have seen how the peso has appreciated due to multiple factors that include the arrival of international agents, stable economic growth and controlled inflation, as well as the reduction in Colombia's fiscal deficit. In addition, there are international drivers such as the trade agreement between China and the United States, the end of the Brexit and the cooling of geopolitical disputes between the United States and Iran".
They point out that "all of the above makes investors dare to try new directions and seek alternative returns as emerging economies are with their fixed and variable income and many other risk assets in the absence of good rates worldwide. After visiting minimum levels of $3,239 we began last week to see interest from the National Territory Directorate buying dollars which has made us correct somewhat upwards. Last Monday it reached $3,298.80 and lacked some strength to see again the $3,300.
They say that "we may correct to a level close to $3,315 before starting again with a fall. Let's remember that next January 15 we must be attentive to the "signing" of phase 1 of the trade agreement between China and the U.S. and not forget that soon will begin the payments of large taxpayers; it is not too much to anticipate that the next market target to value would be at $ 3180 if nothing extraordinary happens in the markets.