Colombian Peso Gains 2.5% Against The Dollar in September on Government Monetization

The Colombian peso (COP) appreciated by 2.5% month-over-month (MoM) in September, driven by government capital inflows and a reduction in the sovereign risk premium during select trading sessions. The foreign exchange flows coincided with high trading volumes, as detailed in a new report by the Economic, Industry & Market Research Area of Grupo Cibest, the parent company of Bancolombia S.A. (NYSE: CIB).

The appreciation of the Colombian peso occurred despite the concurrent decline in international oil prices and relative stability of the US dollar (USD) globally.

A primary factor contributing to the peso’s strength was the monetization of resources executed by the Ministry of Finance and Public Credit. According to data cited from Bloomberg L.P., the government monetized approximately $1.7 billion USD in September, with the capital originating from Total Return Swap (TRS) operations. The majority of this monetization reportedly occurred during the week of September 22.

The foreign exchange inflows correlated with elevated trading activity. Several sessions recorded high transaction volumes. On September 23, traded volume reached $2.3 billion USD, a figure only surpassed by the volume recorded on March 3, 2022. Throughout the month, the USDCOP exchange rate fluctuated between $3,830 COP and $4,047 COP, concluding the month at $3,917 COP, a decrease of $98.92 COP from the August closing level. Analysis of the market indicated that the Relative Strength Index (RSI) remained in oversold territory during multiple sessions. Data on the USDCOP performance was sourced from SET-ICAP, a local trading platform.

Monetary policy adjustments in the United States and the stability of rates in Colombia defined the global and domestic interest rate landscape for the month.

The  USFederal Reserve System (Fed) resumed its monetary easing strategy at the September 17 meeting of the Federal Open Market Committee (FOMC). The FOMC reduced the federal funds rate range by 25 basis points (bp), setting the new target at 4.00%-4.25%. The decision marked the first rate cut since December 2024 and was attributed mainly to evidence of deceleration in the labor market. Individual projections released via the Fed’s dot plot indicated expectations for two additional rate cuts before the close of 2025, followed by one more in 2026, which would situate the federal funds rate range between 3.25% and 3.50% next year. Fed Chair Jerome Powell adopted a cautious stance regarding the prospect of future monetary easing.

In contrast, the Central Bank of Colombia (Banco de la República) maintained the repo rate at 9.25%. Current market consensus does not project additional rate cuts for the remainder of the year.

Analysts forecast the USDCOP exchange rate to trade within a range of $3,850 COP and $4,050 COP throughout October. This projection is reportedly based on anticipated continued global weakness of the US dollar, the cautious policy posture of the Banco de la República, and continued adjustments in capital flow dynamics.

Colombian Peso. Photo credit: Mano Chandra Dhas.