Colombian assets have come under some pressure in recent days as data and political noise has filtered through. A slowing economy likely cements a rate cut by the central bank in December, and moves the odds higher that the cut will be larger than the 25bp asked for by a minority (lead by Finance Minister Bonilla in the past two meetings) but also, for potential acceleration down the road. Meanwhile, the fiscal outlook also clouded as Colombia lost royalty revenues and as President Petro suggested removing the fiscal rule altogether. Overall, these changes should be negative for both the FX and for local rates.
FX: The combination of worsening carry momentum (with gradual but ongoing normalization in the local funding market that added implied yield in COP forwards, coupled with more rate cuts), lower oil prices and the reinflation of political risk premium should continue to be COP negative. Levels below or near 4000 are rich, and our view continues to be for USD longs vs COP. While much still depends on the external picture, especially the US data and policy outlook, we expect COP to underperform and for USDCOP to rise near 4400-4500 in coming months.
Local rates: While the impact may not necessarily be large, the direction is negative from the monetary and fiscal policy sides. Bonilla has in addition said he wants to roll over debt to ease the load, suggesting the medium to longer end may suffer at the expense of nearer term maturities. The mixture is negative. We keep our steepening bias for the longer run. The long end will still be tricky and tactical. Next year supply starts on 10 January with new 10yr on the run tenor, probable 2036 issue, combined with 2042s and 2050s.