Colombian Peso: Downside risk bias against US Dollar – TD Securities

TD Securities notes that the Colombian Peso (COP) has been a top high-yield performer but sees its supportive mix of tight monetary and loose fiscal policy fading. With Banco de la República’s (BanRep) hiking cycle nearing an end and fiscal consolidation expected under De La Espriella, TD argues domestic conditions will increasingly limit USD/COP downside below 3000, leaving the pair more exposed to asymmetric upside risks on risk-off shocks.

Supportive mix for COP fading

"COP sharply rallied following the Colombia Presidential election in Q2 '26. Current short and long-term fair values for USD/COP both sit within the 3200-3300 range, so it makes sense that the USD/COP selloff toward 3000 in August was quick to reverberate back to 3100-3200."

"More importantly, the domestic tight monetary/loose fiscal policy mix that has underpinned COP strength in recent years appears set to become less supportive. The BanRep hiking cycle is coming to an end soon, and we see little reason for BanRep to hike policy rate close to 2022 levels."

"Domestic inflation was more than 13% in 2022 vs 6% in 2026."

"On the fiscal side, market expects fiscal consolidation under De La Espriella, and it is difficult to see Colombia maintaining the same level of positive fiscal impulse as the past years."

"While Colombia is not immediately entering a regime of loose monetary/tight fiscal policy mix that would be outright bearish for its currency, the domestic conditions will likely evolve sufficiently to cut off any left tail below 3000 in USD/COP, making the pair more prone to asymmetrical upside risks on the back of any risk-off shocks."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)