Whither the Colombian Peso?

The Colombian Peso looks set as the next gov't-versus-market battleground. Here are two reports from Bloomberg today. This one sets up the gov''t position:

June 3 (Bloomberg) -- Colombian Finance Minister Oscar Ivan Zuluaga said a stronger peso would be ``catastrophic'' for the economy and the government is ready to take measures to stem gains in the currency, La Republica reported.

Zuluaga said in an interview with the newspaper that the peso would continue to float freely against the dollar. He added that a peso that strengthened to 1,500 per dollar from 1,730 per dollar now would be terrible and cause problems in employment, according to the newspaper. (continues)

This one tells you what the Peso has done today, Tuesday 3rd:

June 3 (Bloomberg) -- Colombia's peso jumped to an almost nine-year high after consumer prices rose more than economists expected in May, adding to speculation the central bank will raise interest rates as soon as this month. (continues)

There's gonna be a fight, dudes. In the same way as the Chilean central gov't snapped the rapid appreciation of its currency vs the dollar....

(click to enlarge)

....and the Peru gov't did the same (though using slightly different techniques)....

(I like these little yahoo currency charts)

.....expect the Colombian central bank dudes to put the brakes on its currency appreciation

(neat, simple, and clear....no hassle visuals)

...especially considering Colombia is suffering from a worse outbreak of inflation than either Peru or Chile, according to the official figures.

So how to play it? The usual way, via sovereign bonds and the currency. The basic rule applies; when a gov't fights its local market, never bet against the gov't. As a play, it worked for Chile, it worked for Peru and it'll work again for Colombia. Don't pull the trigger yet, but wait for the official gov't announcement of when, how and why they are going to weaken the currency against the dollar.

Consider this post your official headsup.