Pangea’s VaR estimates that this currency pair could experience up to 21% volatility in 2024*.

The peso finished 2023 on a strong note, making a new high against the dollar in the final week of the year. Though COPUSD traded in a narrow range during the first two weeks of 2024, the uptrend from the October 2022 low remains intact.
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The most recent reading on inflation was 9.28%, down from over 13% a year ago, but still substantially above the central bank’s 3% target level. Analysts expect a gradual reduction in interest rates in 2024 as inflation continues to fall, but Colombian rates will almost certainly continue to be significantly higher than those in the US.

According to the OECD, the Colombian economy will grow at a moderate rate of 1.4% in 2024 and 3% in 2025. High inflation and interest rates will weigh on domestic demand in 2024. Inflation is expected to return to the 2-4% range in 2025, and policy interest rates are projected to fall to 6% by the end of 2025. Colombia’s exports are dominated by oil, so global demand and oil prices will likely have a substantial impact on economic growth in 2024

On a technical basis the peso appears likely to gain another 5% before it hits the first important level of resistance at the 2022 high. If the peso were to weaken the first level of support is 5% lower than current levels. Unexpected events could push the peso to long-term resistance (+15%) or support (-11.5%) levels.

A historical look at a 2023 USD/COP hedge shows the results of hedging a strengthening Peso with forwards when interest rate differential is high.

Had a company used Pangea to hedge their USD/COP cash flows using forwards beginning in January, they would have received almost 19% more Pesos per dollar against the declining spot rate over the year. As seen in the corresponding image, this was a result of the positive interest rate differential of 7.83% percent (forward rates shown in green) and the strengthening Peso (shown in red).

With economists projecting continued, moderate growth of the Colombian economy, continued appreciation of the Peso is a risk factor that should be considered. With a strong interest rate differential in the buyer’s favor (buying COP), companies can cap their current loss exposure at a significant discount using forward contracts. Using Pangea Prime, a company or user with little to no experience with derivatives can begin hedging using our simple, FX management platform.