Colombia’s Consumer Price Index (CPI) went up to 4.9% in July compared to last year, up from 4.82% previously. This trend shows that inflation continues to be a challenge in Colombia’s economy. The report highlights risks and uncertainties in market activities. Readers should do thorough research before making any financial decisions, as there are no guarantees about the accuracy of future predictions.

Foreign Exchange Trading Risks

Trading in foreign exchange carries high risks due to leverage, which can lead to significant losses. It is vital for traders to understand these risks and consider consulting independent financial advisors if necessary. The views shared are those of the authors and do not represent any official stance. The information is meant to be informative and should not be taken as investment advice. With Colombia’s CPI rising to 4.9% in July, inflation remains stubborn. This slight uptick breaks the recent trend of slowing inflation and will likely catch the central bank’s attention. The market may have expected a continued drop in inflation, so this change suggests that previous assumptions may need to be reconsidered.

Central Bank’s Next Move

We think the Banco de la República is now less likely to reduce its policy rate at the next meeting. Historically, the bank increased rates above 13% during the inflation surge of 2022-2023 to restore stability. This history suggests they might keep rates higher for a longer period to ensure inflation is under control. For those trading derivatives, this outlook could strengthen the Colombian Peso as higher interest rates attract foreign investment. We expect downward pressure on the USD/COP currency pair, which has been around 4,150. A strategy to buy USD/COP put options could be worth considering if the price drops below the key support level of 4,000 in the coming weeks. Anticipating prolonged higher rates will also impact interest rate derivatives. We could see the yields on Colombia’s 10-year government bonds, or TES, rise back toward the 11% level seen earlier this year. Traders might consider entering into interest rate swaps, paying a fixed rate while receiving a floating rate. The equity market may face challenges due to ongoing high borrowing costs. We expect the MSCI Colcap index to struggle, similar to trends we observed in late 2023 when rate hike concerns affected stock prices. Shorting Colcap futures or buying put options on key financial and utility stocks within the index could be strategies to prepare for potential weakness. Uncertainty around the central bank’s next decision is likely to increase market volatility. This environment may lead to an uptick in implied volatility in the options market. Traders could implement strategies like straddles on USD/COP to take advantage of this expected rise in volatility, regardless of which way the market ultimately moves. Create your live VT Markets account and start trading now.

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