Colombian Peso Set To Fall

Includes: CAFE, EC, JO
by: Profit Fan

The Colombian Central Bank met today and has voted in favor of decreasing their interest rate from 4% to 3.75% in what can only be seen as one of many steps toward devaluing their currency.

Even before Venezuela announced its fifth devaluation in a decade, Colombia's Finance Minister, Mauricio Cardenas, was rallying for devaluation of the Colombian peso in what seems similar to what is going on in Japan. On January 29th, Cardenas said that the peso is stronger than its equilibrium rate of 1,950 per dollar. As of now, the peso sits at a mere 1,800 per dollar (8% lower).

Trouble has been mounting, as appreciation has been blamed for the lackluster results from the sale of coffee, obviously a major Colombian export. The peso's appreciation has resulted from increased sales and exports of oil. Oil, which accounts for half of the country's exports, is mostly government owned.

Here is the rub:

1. The government is trying to calm upset coffee growers (and other exporters) who complain the peso's ascent, due to the oil industry, is hurting the farmers.

2. The government owns the oil industry, and any devaluation in the currency will most likely increase energy prices.

Other major considerations:

1. Colombia's Department of Statistics recently announced a $619 million dollar decrease in exports for 2012, coupled with a modest $24 million dollar decrease in imports. This substantial decline in exports represented a 11% drop from 2011 totals of $5.554 billion. As a result, trade surplus moved from $1.050 billion in 2011 to $452 million in 2012, more than a 50% decline.

2. Finance Ministers reported yesterday that Colombia only has enough oil reserves for 8 more years. Let's do the math on that one: if oil is half of the country's exports, that amounts to $2.466 billion for 2012. Trade deficit for the year would have been approximately $2.014 billion if oil sales were to be stripped away. If this is the case, coffee farmers should be at ease, but they will need to start massive expansion to make up for that amount.

Ways to play this:

1. Short the Colombian peso

2. Short Ecopetrol S.A. (NYSE:EC), Colombia's state owned mega oil producer

3. Short coffee futures. If the peso declines and Colombia's coffee prices become more competitive, look for a massive swell in supply.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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