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COP Underperforms Following CPI Data, Fiscal Council Statement

COLOMBIA
  • While the Colombian peso still remains the best performing EM major currency this year, COP has declined 1% on Tuesday, comfortably underperforming its regional peers.
  • The latest inflation data will no doubt be playing its part, with the headline rate dipping below surveyed estimates to 12.13% Y/y, fully justifying the decision by BanRep to hold rates in June and concentrating the focus on when monetary easing could be expected. Swap rates are 1-5bps lower across the IBR curve on Tuesday.
  • While expectations for the start of the easing cycle remain toward Q4 this year, the acknowledgement of the disinflation process may be supporting short-term profit taking dynamics for the Peso. Furthermore, signs of life in the VIX could also be adding weight - the index has ticked higher from the post-covid lows printed in late June and given COP has the third-highest implied volatility, this may be exacerbating moves today.
  • Another factor that may be marginally weighing on the COP is related to the Autonomous Fiscal Council which has stressed there may be difficulties in complying with the fiscal rule, especially if greater spending is approved. Itaú note that the Council's warnings highlight the challenges the Government will have increasing spending as projected by the MoF in its medium-term forecasts, despite the additional structural revenue from tax reforms in previous years.
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