Central Bank Acts to Halt Colombia's Peso Rally

A Seven-Year High That Felt Great, Until It Didn't

If you are an exporter in Colombia and get paid in dollars, the last year has been a slow-motion squeeze.

Every dollar your customers send comes back in pesos. And because the peso has climbed so high, those dollars buy less and less. That is the problem Colombia's central bank just stepped in to fix.

The Colombian peso has been on a monster run. By Friday afternoon, July 31, it was trading near levels not seen since 2019.

That sounds like a win. And for some people, it was. But for exporters, it was a nightmare. Each dollar their customers pay now buys fewer pesos at home, making it harder to cover wages and supplies.

The rally had a few drivers. Colombia pays a 12% interest rate. It lures carry traders, who take out loans in currencies with low yields and park the money in higher-return assets to capture the gap. Higher crude prices and a market-friendly outcome in last month's presidential vote also gave investors more reason to pile into pesos.

It got to be too much. Governor Leonardo Villar delivered the news late Friday, just after the bank's board voted to keep the benchmark rate unchanged. No hike.

Get the market news that matters in a five-minute read with Market Briefs, our free daily newsletter

Here is the twist: most economists expected Colombia to raise interest rates to fight inflation.

Why skip the hike? Because a rate increase would have made the peso even more attractive to carry traders. That would push the currency higher, not lower. So the bank went the other way.

The Central Bank's Unconventional Answer

Starting next month, the central bank will hold monthly put option auctions, but it will buy only if the peso falls below its 20-day moving average. The first auction, capped at $400 million, is set for Monday. Officials said the same method added about $1.5 billion to foreign reserves in 2024.

Wells Fargo's Alvaro Vivanco was blunt about the strategy: "This is how you weaken your currency: No hikes when everyone was expecting it and dollar buying."

Vivanco added: "So much for the 'peso stronger forever' story that people have bought."

What Happens Next

The peso had already closed for the day. Brendan McKenna at Societe Generale put it directly: the peso "will open sharply weaker come Monday as a result, and that depreciation may continue as some of the long positions that have build up post election are likely to unwind."

Pairing the rate hold with reserve purchases signals the central bank "was getting a little uncomfortable with the pace of the peso's appreciation," McKenna said.

Colombia is not alone in the region in deliberately trying to cool its currency this year. Uruguay cut interest rates in January after the peso's sharp rally slowed consumer prices and threatened its inflation targets. Costa Rica has also intervened to steady the colon, something it had not done since 2015.

The bottom line: the peso's winning streak just hit a speed bump. For anyone holding Colombian assets or planning to send money there, expect a bumpier ride in the weeks ahead. For everyone else, it is a reminder that in currency markets, what goes up can be gently, deliberately pushed back down.

Join Market Briefs, our free daily newsletter, for a quick daily rundown of the markets