Goldman Sachs Revise USDCOP Forecasts Higher To Reflect Challenges

To reflect continued challenges, Goldman Sachs are shifting their USDCOP forecasts to reflect further short-term local weakness. They now see USD/COP at 5100, 4900, and 4600 in 3-, 6-, and 12-months, respectively (from 4700, 4500, and 4200 previously).

• COP pressures have sharply intensified and GS measures now suggest that a large risk premium has been priced into the Peso, reflecting a striking increase into and through Colombia’s most recent election, the largest risk premium in LatAm FX, and the largest risk premium we’ve measured in COP over the past 16 years.
• The clear catalyst for the upward inflection in USD/COP has been an ill-timed rise in policy uncertainty: with external balances deteriorating and domestic inflation still on an upward trajectory investors have been increasingly concerned around fiscal spending proposals that could widen deficits further, and push inflation higher.
• Furthermore, concerns around the potential imposition of capital controls, or perhaps the imposition of penalties for capital leaving Colombia, have likely exacerbated market moves. At this juncture, risks remain tilted towards further COP weakness.
• Given its macroeconomic consequences, the speed of the Peso’s move over the past several sessions is clearly unsustainable, which in turn means that—setting aside their punitive carry—outright COP shorts would be subject to the risk of a sharp turn in rhetoric or policy.