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Goldman Sachs Adjust USDCOP Forecasts Lower

COLOMBIA
  • Goldman Sachs have adjusted their USD/COP forecasts to 3800, 3700, 3700 in 3-, 6- and 12-months (vs 4000, 3900, 3900 previously). This path of more front-loaded appreciation is similar to what GS forecast for other EM HY currencies where they expect the bulk of the spot performance to come in the next 6 months, before easing cycles are more clearly underway.
  • With the broader inflation relief rippling through markets, GS think it makes sense for EM FX investors to consider not only high nominal carry (which clearly outperformed in H1) but also to dial up the cyclical beta of their portfolios as the market more squarely embraces the soft-landing scenario.
  • In this context, GS think the Colombian Peso is one of the better placed EM currencies to benefit from this shifting market narrative. For one, even as EM carry has declined through the year, COP still features the highest level of nominal carry in EM FX, which will keep total returns supported. At the same time, the Peso is one of the more cyclical currencies in EM FX due to its high beta to global equities, the broad Dollar as well as to oil prices.
  • In addition to this, the domestic backdrop continues to be less of a headwind for COP performance than earlier in the year. Inflation has continued to slow with core and services inflation decelerating and inflation expectations have also been declining. Upcoming regional elections should reduce the scope and speed of any potential market-unfriendly reform.
  • COP has already taken credit for this improving backdrop to a large extent. That said, while the pace of appreciation may slow after a strong run, GS think there is still further room to go if the external backdrop remains supportive. Plus, from a valuation standpoint, the Peso still embeds a risk premium of just under 10% on their estimates.
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