USD/COP appears to be on track to test 2016 lows - BBH

According to analysts from Brown Brother Harriman, Colombia has solid fundamentals, but the economy remains dependent on oil prices. They believe that the peso’s (COP) outlook will be driven largely by external factors.

Key Quotes:

“The economy is slowing. GDP growth is forecast at around 2.5% this year before accelerating modestly to around 3.0% in 2017 and 3.5% in 2018.  GDP rose 2.5% y/y in Q1, and is tracking less than 2% so far in Q2.  As such, we see downside risks to the forecasts. Past tightening has led to a sharp slowdown in consumption, with retail sales dropping y/y for two straight months and in three of the past four.”

“Price pressures are still rising, with CPI up 9.0% y/y in July.  This is the highest rate since June 2015, and suggests that the tightening cycle has not ended.”

“The next central bank policy meeting is August 31, with median forecast of no change.  With inflation more than double the top of the 2-4% target range, we think there is a chance of a hawkish surprise then.  Factors arguing against another hike are the weak economy and strong peso.” 

“USD/COP appears to be on track to test the May low near 2817 and then the November 2015 low near 2785.  After that is the June 2015 low near 2508 and then the May 2015 low near 2352.  Much will depend on external factors, as the peso is highly correlated to WTI oil prices.  The -0.618 correlation coefficient (daily percentage changes) is second only to the Russian ruble (-0.716) amongst the major EM currencies.”

“Policymakers have acted to prevent excessive moves in the exchange rate. Last October, it started selling dollar call options when the exchange rate weakened more than 5% from its 20-day moving average. It later adjusted the trigger to 3% this February before eliminating the program altogether this June. Given the excessive weakness since in 2014-215, we do not think current COP strength is a concern yet.”