Colombian peso weakens on dollar shortage, carry buying
The Colombian peso weakened as a shortage of dollars in local markets collided with renewed carry trade buying, leaving the currency exposed to sharper moves even as global yields stay relatively high.
That combination matters because it can amplify exchange-rate volatility, raise hedging costs and complicate inflation management in an economy still sensitive to imported prices and foreign capital flows. When dollars are scarce, even modest demand from investors seeking to exploit Colombia’s interest-rate differential can push the peso around more aggressively than fundamentals alone would suggest.
The broader backdrop is a market still anchored by elevated U.S. rates. The 10-year Treasury yield was at 4.74% in the latest reading, while the 2-year note stood at 4.24%, levels that keep dollar assets attractive and sustain cross-border funding pressure. Adalytica’s U.S. dollar trade signals also showed “Extreme Fear” on sentiment, even as awareness remained “Extreme Greed,” a mix that points to crowded positioning and quick swings in direction.
For Colombia, that is a difficult setup. A classic carry trade works when investors borrow low-yielding currencies and buy higher-yielding ones such as the peso, but it can reverse quickly if dollar liquidity tightens or if global risk appetite fades. The result is often a one-way market in the short term, with local currency weakness feeding on itself as importers, corporates and leveraged investors rush to secure dollars.
Technically, the dollar-peso pair has also been recovering from oversold conditions. USDCOP closed at 3,125.09 on Aug. 27, up from 3,063.7 two sessions earlier, with the 14-day RSI rising to 44.0 from 23.3, a sign of improving momentum. Even so, the pair remained below its 50-day moving average of 3,243.98 and far under the 200-day average of 3,577.44, suggesting the peso’s longer-term uptrend has not fully broken.
For investors, the immediate question is whether the move is a temporary squeeze or the start of a more durable repricing. If dollar scarcity persists, local assets may become more volatile and the peso’s carry appeal could be offset by higher tail risk. If U.S. rates stay elevated or global risk sentiment deteriorates, the currency could face further pressure despite Colombia’s yield advantage.
The key catalyst now is whether dollar liquidity normalizes and whether carry inflows continue to outpace hedging demand. Until then, the peso is likely to trade as a funding-sensitive currency, vulnerable to any shift in global rates or risk appetite.
| Entity | Gains | Losses |
|---|---|---|
| Carry traders | ▲Higher yield pickup | ▼Higher FX volatility |
| Colombian importers | ▲— | ▼Dearer dollar funding |
| Exporters | ▲Competitive receipts | ▼— |
| Local borrowers | ▲— | ▼Higher hedging costs |