The currency that has strengthened the most against the U.S. dollar in 2012 is the Colombian Peso and the Colombian authorities are none too pleased. Forex intervention is the name of the game and the Colombian central bank is more than willing to play along. They've already been making daily purchases of $20 million but it's not having the desired effect so now they're going to pull out a bigger gun.
From the WSJ:
So far the government's intervention in the foreign exchange market has been limited to daily purchases of $20 million daily by the central bank, a move designed to soak up U.S. currency from the spot market. Yet with daily trading volumes averaging nearly $1 billion, most traders point out that the central bank purchases are not sufficient to have an impact in the peso's movements.
"We are now in favor of a more intense, more aggressive and more in-depth strategy," [Finance Minister Juan Carlos] Echeverry said.
The finance minister's comments comes on the heels of the central bank's decision Friday to keep its key rate on hold at 5.25%, a move that in theory should dissuade so-called carry trades under which global investors borrow money at low interest rates in the U.S., Japan or Europe and then invest at high rates in Colombia.
The Peso has been on a nice roller coaster ride since the middle of 2011, with the USDCOP cross climbing from 1.74 up to 1.98 and now all the way back down to 1.74 again.
Gas prices at the pump in Columbia are currently $4.10/gallon. People in the U.S. are complaining about close to $4 gas and then consider that Columbia's per capita gdp is about one fifth of that in the U.S. (~10K vs ~50K) and well.... we'll let you do the math. We're also going to take this opportunity to bust out our recently completed global gasoline price chart:
What is interesting is that the equity market has been climbing while the currency has been strengthening. Although considering that the latin american region has a history of inflation issues, it makes sense for investors to view a strengthening currency as a net positive, despite the effect on the current account deficit. We would expect the equity markets to turn back downwards if the central bank shows sustained progress with their devaluation plan.
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