Colombia has a floating exchange regime, which allows the currency to work as a shock absorber under local and global economic events. Transactions in the foreign exchange market are done through the Exchange Market Intermediaries (Intermediarios del Mercado Cambiario, IMC) and are registered in the SET-FX electronic trading platform.
The Colombian peso spot can be traded same day on weekdays from 8.00am to 1.00pm, as well as T+1, T+2 and T+3 until 4.30pm. The official fixing rate, the Tasa Representativa del Mercado (TRM), is calculated as the average of all transactions that passed through the SET-FX on the prior day and is published by the Colombian Financial Regulator.
Background
Even though most of the daily transactions are completed the same day, forwards and options are also traded in the market. Forwards (over-the-counter) can be settled in cash (non-deliverable forwards, NDFs) or by physical delivery of the currencies involved. However, local regulations only allow physical settlement when there is an asset or liability to be hedged. At maturity the NDF value is calculated based on the TRM. More than 85% of transactions are between seven and 45 days. Settlement procedures are the same as those for forwards. The average daily volume of all local markets in 2016 was $1.1bn, while the average of the offshore market was about one-third that amount.
The central bank sets the regulations for the forex market and can intervene to control volatility through daily spot auctions, US dollar options and forex swaps. During 2016 the central bank intervened in the forex market when the TRM was more than 3% above its 20-day moving average, targeting the exchange rate volatility, although it suspended this rule shortly thereafter and announced that it would continue to intervene only at its discretion. In 2015 the central bank also relaxed regulation on the proprietary position, allowing its three-day moving average to be negative, a measure that also lifted pressures off the exchange rate.
In 2016 the Colombian peso remained very volatile, consistent with oil prices falling to their lowest level in 12 years and heightened global financial uncertainty – especially due to China’s economic underperformance. This led the exchange rate to reach an all-time high of COP3440:$1 in February 2016, and was one of the most depreciated currencies in Latin America. Since then, and until Donald Trump’s election as president of the US in November 2016, the Colombian peso saw a strong recovery, reaching levels below COP2900:$1 led by higher oil prices, renewed expectations of eased global monetary policy and a faster-than-expected adjustment of the current account deficit.
Projection
The outlook for emerging currencies has become more challenging after Trump’s election. Colombia has strong trade ties with the US – including a free trade agreement since 2011 – and with about 40% of Colombia’s exports headed to the US, the Colombian peso is vulnerable to potential restrictive trade policies under the Trump administration. At the same time the relatively large current account deficit makes the Colombian currency vulnerable to a stronger US dollar, given renewed expectations of faster interest rate hikes in the US and reduced foreign capital inflows to emerging economies.
Despite these uncertainties, the exchange rate at end-2016 was COP3000:$1, and looking into 2017 a number of factors could lift pressures off the Colombian peso: the recent signature of a peace agreement with the country’s largest guerrilla group; an improved fiscal outlook due to the approval of a major tax reform in late 2016; the expectation of higher oil prices; a further adjustment of the current account deficit partly driven by the floating exchange rate regime; and a new and expanded two-year flexible credit line with the IMF worth $11.5bn.
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