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‘Last chance’ for cheap dollars, says Colombia’s Cárdenas

Nov 5, 2013

Colombian finance minister Mauricio Cárdenas warns the peso is set to fall further, as other Latin American policymakers brace for similar moves

Colombia’s finance minister has fired a sharp warning shot over the likely fallout from the US’s normalization of monetary policy, saying the peso is destined to weaken.

"I’m convinced that this is the last chance that markets have to buy cheap dollars," Mauricio Cárdenas tells LatinFinance. "Our currency is too strong and it’s not going to remain as strong as it is now."

The comments come after a sharp sell-off in the Colombian peso pushed it from 1,842 to the US dollar in May, to 1,950 in early September. While the rush out of the peso reversed somewhat — it was trading around 1,880 to the dollar in late October — Cárdenas says the broader trend will continue.

"Higher interest rates in the US and lower commodity prices definitely point in the direction of depreciating currencies in countries like Colombia. The tendency is for the US dollar to get stronger and for Latin American currencies to get weaker. That’s where the fundamentals are heading." 

Across Latin America, policymakers are bracing for the unwind of the US’s quantitative easing program. Some have intervened in their currency markets in recent years as developed market central banks flushed liquidity into their slowing economies. Now, Latin policymakers are facing a drastically different situation.

"In terms of the global environment we still are concerned about the important unknowns, the uncertainties surrounding mostly the two key policies in the US, monetary and fiscal," says Agustín Carstens, governor of the Bank of Mexico. "We don’t have much clarity there and we will have to follow this very closely."

A weaker currency is not necessarily a bad thing — Carstens notes that a falling peso will give exporters a lift.

Peru is resilient to abrupt changes of market moods, says finance minister Miguel Castilla. "Tapering affects us in that there is no more cheap external capital," he tells LatinFinance. "But most of our external capital is FDI, so it is less linked towards a yield seeking objective."

The sol has also weakened since May, falling from 2.60 to the dollar, to nearly 2.80. Peru’s central bank has slashed bank reserve requirements in a bid to keep liquidity in the system.

"We have been reducing reserve requirements for four months," says Julio Velarde, the governor of Peru’s central bank. "It has helped the growth of credit. It’s a sort of QE. In August, the flow of credit was the second highest in 44 months." LF

For more on policymakers’ currency views, and for Cárdenas’ outlook on Colombia’s investment needs, see the November/December issue of LatinFinance.

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