Dollar vs Peso

the dollar could continue to fall in the coming months

The Colombian peso is currently one of the few currencies that is depreciating while others are experiencing significant gains. However, the dollar could continue to fall in the coming months. Why?

For me, obviously, it influences the fact of having an inept president who is involved in many scandals with recordings and strange murders, which causes him to lose support for implementing strong reforms, and more and more political parties are moving away from his vision.

Therefore, for investors, this motivates them to invest in Colombia because it provides stability to know that the idiot we have as president will not be able to do anything.

The recent drop in the exchange rate has revived questions from clients and investors about the structural level of our currency in the medium term.

The Colombian peso is significantly depreciated and gradually, we should seek levels that are more in line with the macro and market fundamentals that currently govern us.

Our appreciation thesis (which has positioned us as the most bearish analysts in the market in several surveys) is supported by some pillars that would allow us to reach levels below $4,000 per dollar in the next year:

The dollar in the world should lose value. When Colombia reached its historical exchange rate high ($5,117 per dollar), the DXY indicator, which measures the strength of the US currency globally, was also quite high (around 110 points, close to highs not seen since 2002).

Since then, the US currency has depreciated against its most important counterparts, and we believe it will continue in this trend as there is a realignment of international flows towards emerging economies with attractive interest rates, stronger growth, and after a golden period in the United States that attracted a large portion of global capital. Colombia is highly misaligned compared to the region.

When we compare ourselves with our peers in Latin America, we notice that the Colombian peso has been one of the most punished currencies, while others are experiencing significant gains (compared to levels at the beginning of 2022).

While this year the peso is positioning itself as one of the best currencies in the world, last year it was one of the worst, and this does not align well with the economic fundamentals of the Latin American countries, which are all enjoying currency appreciation, with the exception of Colombia.

This region is favored by high commodity prices, being far from geopolitical conflicts, and the 'nearshoring' phenomenon, which leads to a realignment of global production towards emerging countries that are geographically close to developed ones.

The country risk is high, but uncertainty is gradually moderating. Since 2021, when Colombia lost its investment-grade rating, social protests occurred, and the tax reform failed, our risk premium has been climbing (accentuated by comments regarding capital controls or changes in energy policy).

Today, we face one of the highest risk perceptions in the region, even surpassing Brazil, which has weaker fiscal figures and a weaker credit rating than ours. Politics have certainly influenced this situation, but over time, it has been reaffirmed that Colombia operates under a democratic system with a balance of powers. Foreign investors have understood this from the beginning, leading them to bring significant investment flows to the country, which have not been seen in several years.

All these arguments remain valid as of today, and we believe they will continue to support our view of the dollar falling against the peso in the coming months.

This does not mean that volatility will disappear and that the decline will be uninterrupted. What we are talking about are medium-term trends that should be governed by economic and market fundamentals. We have been saying since last year that the dollar is expensive, and we believe there are still further declines to come.