Bancolombia Warns Colombia’s Peso Has Detached From Its Fundamentals

Fair value nears $3,720 COP signals downside risk for peso holders

The Colombian peso strengthened 115 pesos against the US dollar last week to close at $3,335.46 COP, a 3.35 percent weekly appreciation that Grupo Cibest’s economic research team attributed to a weaker US dollar globally and to a larger-than-expected interest-rate increase at home. In its July 6 weekly report, Radar Bancolombia, the research unit of Bancolombia argued that the currency now trades well below the level its fundamentals would justify.

The Junta Directiva del Banco de la República (the central bank’s board of directors) raised its benchmark policy rate by 75 basis points to 12.00 percent, its highest level since March 2024, surprising a market that had priced in a 50-basis-point move. Even so, the bank argued that a rate consistent with Colombia’s macroeconomic and fiscal conditions should push the exchange rate toward a range between $3,400 and $3,650 COP.

What is moving the peso?

To isolate the drivers of the currency, the research team estimated a structural vector autoregression (SVAR) model that breaks the annual change in the market representative exchange rate (TRM) into international factors, local factors, exchange-rate dynamics and a speculative gap. The exercise found that during 2026 local factors have gained prominence and now explain close to half of the peso’s movements.

In June, Colombia’s sovereign risk premium corrected sharply, reflecting an improved perception of country risk tied to the coming change of administration. The nation’s five-year credit default swaps fell 69 basis points from the first round of the presidential vote — a 29 percent annual decline in June — and now sit about 24 basis points below the level the bank considers consistent with fair value. Among regional peers, Colombia’s policy rate is exceeded only by Brazil’s 14.25 percent, which the bank said keeps carry-trade strategies attractive.

The chart shows how the Colombian peso and the US dollar has detached from the fair value rate of the government. Chart by Finance Colombia.

Measured against where it should trade if it merely tracked its peer currencies and incorporated the deterioration in external fundamentals, the exchange rate should stand near $3,720 COP, Bancolombia estimated. The bank placed the currency’s fair value in a range between $3,710 and $3,880 COP, and noted that the United States economy has shown resilience, backed by technology investment, while inflationary pressures continue to limit the room for maneuver of the US Federal Reserve.

From September 2025, the observed rate detached significantly from that fair value. The bank linked the move first to monetization by the Ministerio de Hacienda (Finance Ministry) — foreign-currency sales of roughly $9 billion USD between September and December, against average daily spot volume of about $1,337 million USD in 2026 — and later to optimism over the change of administration. Those operations drew on a Total Return Swap, new euro-denominated bond issues and a direct placement to Pimco of $23 trillion COP, which raised about $5 billion USD. The gap against peer currencies turned negative after the first-round vote and has since averaged -$225 COP.

The bank described the pattern as a trade electoral — a repricing of Colombian assets in anticipation of a more market-friendly government — that held through much of the second half of 2025 and into 2026, interrupted only when polls showed a wider gap among the presidential candidates.

Bancolombia expects the peso to stay stronger than its fundamentals over the coming months, but not indefinitely. The bank projected the exchange rate in a range between $3,400 and $3,650 COP for the second half of 2026, converging gradually toward fair value in 2027. As long as the local interest-rate cycle keeps favoring long-peso carry positions and optimism persists, the bank said, the peso could reach the lower bound of that range.

“A persistent deviation looks unlikely, since over the long run the exchange rate has not structurally departed from the level observed in its peers.” — Grupo Cibest economic research, Radar Bancolombia

On the external side, the bank flagged persistent pressure toward depreciation from falling international oil prices and limited room for further US dollar weakness. Brent crude, which rose 5.8 percent year over year in the first quarter and 51.2 percent in the second amid the Middle East conflict, had already fallen 26 percent from a peak near $118 USD per barrel to around $72 USD. The bank cautioned that sustaining the currency’s current strength would depend on credible fiscal consolidation, given challenges related to inflation, the El Niño phenomenon, weak investment, the health system, security conditions and the lag in strategic sectors such as mining, energy and construction.

International backdrop

The US unemployment rate fell 0.1 percentage point to 4.2 percent in June, its lowest in a year, the Bureau of Labor Statistics reported, though the economy added just 57,000 jobs, below the 114,000 analysts expected. Hiring concentrated in professional services, up 36,000, social assistance, up 25,000, and health, up 22,000, while lodging shed 61,000. The labor participation rate fell 0.3 percentage point to 61.5 percent, its lowest since March 2021, as 720,000 people left the labor force.

Eurozone inflation eased 0.4 percentage point to 2.8 percent in June, a three-month low and below the 3.0 percent consensus, though still a fourth month above the European Central Bank’s 2 percent target. Core inflation fell to 2.4 percent. In China, the composite purchasing managers’ index rose to 50.6, above the 50 threshold that separates expansion from contraction, with manufacturing at 50.3 and non-manufacturing at 50.2, while construction stayed in contraction.

Colombia’s economy

The Banco de la República resumed its tightening cycle, lifting the policy rate to its highest level since March 2024. Bancolombia expects a further 75-basis-point increase, to 12.75 percent, as inflation expectations drift higher. Consumer inflation was set to rise for a fourth straight month in June, to about 6.13 percent annually and its highest reading since July 2024, on the bank’s estimate of a 0.38 percent monthly gain; analysts polled by the central bank had expected 0.32 percent. Analysts see inflation ending 2026 near 6.52 percent, against the bank’s own 6.4 percent scenario.

Colombia’s national unemployment rate stood at 8.0 percent in May, down 1.04 percentage points from a year earlier and a record low for the month, according to the national statistics department (DANE). Informality was 54.2 percent, and the bank maintained its 9.0 percent urban unemployment projection for 2026. Business sentiment moved the other way: Fedesarrollo’s commercial confidence index fell to 20.5 points and its industrial confidence index to -2.9 points in May, which the bank tied to uncertainty around the presidential election.

Goods exports likely extended double-digit growth in May, to an estimated $5.46 billion USD FOB, up 25 percent year over year, led by non-traditional products — non-monetary gold, copper ores and flowers — and by oil sales at an average price near $107 USD. The bank noted a 37 percent accumulated drop in the first quarter and expected exports to stabilize following the normalization of the tariff dispute with Ecuador.

Fixed income and yields

The US Treasury curve steepened bearishly, with short-dated yields up about 8 basis points and long-dated yields up about 11, after Iran’s foreign minister said no direct US-Iran meetings were scheduled and after US Federal Reserve chair Kevin Warsh, speaking at the European Central Bank’s Sintra forum, reiterated the central bank’s commitment to its 2 percent inflation target. Citi’s economic surprise index held in positive territory for a sixth consecutive month at 57.8. Advanced-economy 10-year yields were mixed over the month, with Japan up 10 basis points and France up 3, against declines of 12 in Germany and the eurozone and 11 in the United Kingdom.

Colombia’s fixed-rate TES curve rallied, with yields down 22 basis points at the short end, 23 in the middle and 9 at the long end, supported by calmer Middle East conditions, the fall in the country’s five-year CDS to levels last seen in 2021, and announcements from the incoming government — among them, the report said, the naming of Miguel Gómez as finance minister. The cash balance of the Dirección del Tesoro Nacional (National Treasury) rose to an average of $20.7 trillion COP in June, up $5.6 trillion from May, or 1.16 percent of GDP. Tax collection grew 7.4 percent year over year in May, to $35.1 trillion COP, led by income tax at $15.3 trillion COP and internal value-added tax at $11.8 trillion COP, according to the tax authority (DIAN).

Commodities and equities

Gold rose to about $4,112 USD per ounce after the US jobs report, while Brent crude closed at $71.94 USD per barrel and West Texas Intermediate at $68.69 USD, little changed on the week as traffic through the Strait of Hormuz recovered and the Organization of the Petroleum Exporting Countries prepared to announce a production increase at its July 5 meeting.

The COLCAP index closed the week up 0.4 percent at 2,295.7 points. The biggest gainers were Cementos Argos (BVC: CEMARGOS, PFCEMARGOS), up 3.5 and 3.1 percent, and Grupo Cibest (NYSE: CIB; BVC: CIBEST), up 3.1 percent, while Davivienda (BVC: PFDAVVNDA), the PEI real estate vehicle and Grupo Nutresa (BVC: NUTRESA) led the declines. Grupo Nutresa launched a share-repurchase offer for up to 3,333,333 shares at $300,000 COP each, with an acceptance deadline of July 3. Davivienda placed $270.1 billion COP in the sixth tranche of its twelfth ordinary bond issuance, drawing offers of $343.99 billion COP.

The figure shows the change in the Colombian peso and how local and international factors seem to be affecting it in a negative direction. Chart created by Finance Colombia.

On Wall Street, the S&P 500 rose 1.8 percent, the Dow Jones 2.0 percent and the Nasdaq 2.1 percent, their best quarter in six years, led by semiconductor and artificial-intelligence infrastructure shares even as investors questioned the sustainability of those valuations. Tesla (NASDAQ: TSLA) lifted deliveries 25 percent year over year in the second quarter, and Lime (NASDAQ: LIME), the shared electric-bike and scooter operator, debuted on the Nasdaq with a $167 million USD raise and a valuation near $1.6 billion USD.

European indices advanced, with the Stoxx 600 up 2.7 percent, the DAX 4.5 percent, the CAC 40 1.5 percent, the FTSE 100 1.6 percent and the IBEX 35 2.2 percent, led by defense shares and with Siemens (XETRA: SIE) contributing to the DAX. KNDS postponed a planned Frankfurt and Paris listing, while Renk (XETRA: R3NK) agreed to acquire Britain’s David Brown Defence for about $200 million USD. In Asia, the Hang Seng rose 3.0 percent, the Nikkei 225 0.6 percent and the Shanghai Composite 0.4 percent; China Resources New Energy staged Asia’s largest listing so far in 2026, raising about $3,600 million USD in Shenzhen.

The full report, Fortaleza del peso colombiano bajo la lupa: entre el optimismo y sus fundamentales, was published by Grupo Cibest’s Dirección de Investigaciones Económicas, Sectoriales y de Mercado, led by Laura Clavijo.

Headline image description: The chart shows how the Colombian peso has depreciated significantly in comparison to other similar currencies in the market by a margin of 500 points. Chart created by Finance Colombia.