Colombian Peso Loses Supportive Mix Amid Fading Hiking Cycle
The Colombian Peso (COP) has been one of the top high-yield performers, but TD Securities believes its supportive mix of tight monetary and loose fiscal policy is fading. The Bank of Colombia's (BanRep) hiking cycle is nearing an end, and fiscal consolidation under President-elect De La Espriella is expected to limit the peso's upside potential. In 2022, domestic inflation peaked at over 13%, compared to around 6% in 2026.
TD Securities notes that while Colombia is not entering a regime of loose monetary/tight fiscal policy mix that would be bearish for its currency, the domestic conditions will likely evolve sufficiently to cut off any left tail below 3000 in USD/COP. This makes the pair more prone to asymmetric upside risks on the back of risk-off shocks.
The current fair value range for USD/COP is between 3200 and 3300, which suggests that the recent selloff toward 3000 was quick to reverberate back to 3100-3200. TD Securities sees little reason for BanRep to hike policy rates close to 2022 levels.