Colombia’s Pension Funds have been discouraged to perform foreign-exchange transactions in a bid to halt volatility in the Peso.
The Finance Ministry said obligatory pension funds will only be allowed to perform foreign-exchange transactions for a period of five business days for a maximum of 2.5% of the fund’s value. “The measure seeks to stop operations that have generated volatility in the exchange rate,” the Finance Ministry said in a statement. The total value of Colombia’s obligatory pension funds is $52 billion, which means that, over a period of five days, the foreign-exchange transactions of the funds can’t surpass $1.3 billion, the statement said.
The Colombian government, which has struggled to tame the peso’s strength against the dollar for much of this year, is now seeking to keep the peso stable at its current levels. The peso suffered a sharp decline in September as fears emerged of a sovereign-debt crisis in Europe and a new recession in the U.S.
Local brokerage Correval said in a research note that the measure disclosed was unlikely to have an impact on the peso’s medium-term appreciation trend. The government’s decision, however, could limit liquidity and as a result could reduce volatility in the exchange rate, Correval said.
Last month, the central bank disclosed it will step in and buy or sell $200 million dollars if the peso moves up or down by more than 2% from its 10-day average in a effort to limit volatility in the exchange rate.
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The peso is trading around COP1,900.3 to the dollar. The central bank has been known to intervene in the currency, in August 1998, pressure on the peso stepped up, inducing the authorities to widen the intervention band by 9%, effectively devaluing the currency. The peso came under renewed pressure in March 1999 and June 1999, when it devalued by about 20%.
The Colombian peso (COP) is a freely convertible currency. The Central Bank allowed the peso to float freely against the dollar in September 1999 and market forces determine the exchange rate.
Currency speculation by foreign investors transactions are not allowed according to The Superintendency of Finance concept based on Decree 2080 modified by Decree 4800 of 2010, since currency transactions are not considered securities registered before the National Securities Registrar.
Colombian retail investors have taken to margin FX trading as the local bourse has limitations and opportunities are limited. Brokers will find that retail traders have some issues in transferring funds for Fx trading.