Colombian Peso Slumps as Traders Eye Revised Fiscal Plans

(Bloomberg) -- The Colombian peso plunged as much as 3.2%, extending weekly losses as traders fret over a widening fiscal deficit and an increase in the debt ceiling.

The peso was the worst performing currency in the world on Thursday, hitting the lowest level since October before trimming losses. It has far outstripped the decline in its Mexican counterpart this week, which had grabbed all the headlines after the surprise election results.

The government will present its mid-term fiscal framework on Friday, defining the budget goals for the coming years. It comes after Moody’s Ratings warned that the South American nation will miss its deficit target for this year, which was already high at 5.3% of gross domestic product. 

“The COP should remain under pressure in the long term, especially as Colombia has not come up with a credible growth model as it moves away from dependency on hydrocarbon exploration and production,” said Thierry Wizman, director of global currencies and an interest-rate strategist at Macquarie Futures.

JPMorgan Chase & Co. turned bearish on the Colombian peso, saying lingering discussions around the country’s fiscal rule and an acceleration in the pace of monetary easing will weigh on the currency. 

“The peso has been outperforming the high yielders in the region but we think the inertia of the move will eventually lead to some catch up with the losses of BRL and MXN,” strategists including Gisela Brant and Tania Escobedo Jacob wrote in a note.

The selloff began after the government raised the debt ceiling on Tuesday, and the comments by Moody’s on Wednesday further increased pressure on the currency, said Brendan McKenna, a currency strategist at Wells Fargo.

The government is trying to reign in spending, with the cabinet approving on Monday a spending cut of 20 trillion pesos ($5 billion). But the announcement failed to reassure markets. 

“Fiscal worries and the continued unwinding in Latin American currencies” have weighed on the Colombian peso, said Brad Bechtel, global head of FX at Jefferies. “The break of the 200-day moving average opened a move to 4,200 initially and potentially 4,400 after that.”

--With assistance from Vinícius Andrade and Oscar Medina.

(Updates with comments from JPMorgan. A previous version corrected size and scope in the deckheadline and second paragraph.)

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