Colombian Currency’s Wider Swings Fuels Intervention Bets

The biggest swings in four years for Colombia’s peso are fueling speculation that the nation’s central bank will follow the steps of Mexico and Peru in taking measures to ease volatility in the currency.

A shortage of dollars in the Colombian market is exacerbating fluctuations and may lead policy makers to adopt measures that would seek to bolster business confidence, according to Banco de Bogota and Corredores Davivienda.

One-month implied volatility on options for the peso, reflecting projected shifts in the exchange rate, jumped to 21 percent Friday in Bogota, the highest among 31 major currencies after Russia’s ruble.

While the peso rallied 6 percent in the past two days as oil prices surged, the Colombian currency is still down 23 percent this year, second only to Brazil’s real for the worst decline among major tenders.

 Colombia’s currency has been punished by the tumble in crude, which accounts for about half its exports. “Those huge one-day jumps in the peso are heightening the risk that the move becomes disorderly,” said Camilo Perez, the head analyst at Banco de Bogota. “The market needs short-term liquidity.”

 While Colombian policy makers haven’t discussed measures to reduce currency volatility or curb the slide in the peso, they have a range of tools to be used if necessary, central bank Co-Director Ana Fernanda Maiguashca said in an interview Monday. A drop in the peso probably wouldn’t, by itself, trigger a response, she added.

A day later, central bank co-director Adolfo Meisel said that the peso’s decline is a response to lower oil prices and that currency intervention could be triggered by “illiquitidy in the foreign exchange markets, which we aren’t seeing.”

Should inflation accelerate this month, policy makers may be inclined to intervene, Perez said. Currency swaps, which the central bank earlier this year included as a possible intervention tool, will likely be the instrument of choice as they don’t imply reducing international reserves, he said.

Colombia’s central bank voted in a split decision to hold the benchmark rate at 4.5 percent Friday. Last month, some policy makers voted to raise borrowing costs a quarter percentage point, saying the weaker peso was contributing to faster inflation.

Banco de la Republica won’t probably intervene, and if it does make a move it will be to raise borrowing costs to keep inflation expectations anchored, according to Juan Lorenzo Maldonado, an economist at Credit Suisse Group AG.

Still, central bankers will likely be watching the currency swings as the heightened volatility may hamper imports, said German Cristancho, the head analyst at Corredores Davivienda.

“Volatility is so high that if the mechanisms the central bank usually uses were active, they would be triggered,” Cristancho said. “Under these circumstances, it’s justifiable.”

bloomberg.com