Colombia's peso to become Latin America's worst performer by 2026, Capital Economics warns

Capital Economics projects the Colombian peso (COP) to depreciate significantly to 4,600 against the U.S. dollar by the end of 2026, positioning it as Latin America's worst-performing major currency. This forecast, driven by concerns over Colombia's fragile fiscal position and an anticipated worsening current account deficit, contrasts sharply with the COP's surprising 9% year-to-date appreciation, which currently ranks it among the region's best performers.

Analysis

A Capital Economics report presents a significantly bearish outlook for the Colombian Peso (COP), forecasting a depreciation to 4,600 against the U.S. dollar by the end of 2026. This projection, which would position the COP as Latin America's worst-performing major currency, stands in stark contrast to its current strength, having appreciated approximately 9% year-to-date to a level of 4,039. The report attributes the negative forecast to fundamental macroeconomic weaknesses, specifically Colombia's "fragile fiscal position," which is expected to deteriorate further ahead of elections next year. An anticipated worsening of the country's current account deficit is cited as the other key driver for the projected decline. The analysis highlights that the peso's recent rally is "perhaps surprising" given existing headwinds like fiscal challenges and a deteriorating relationship with the U.S., suggesting the currency's current valuation may be disconnected from its underlying economic fundamentals.

Key Decisions for Investors

• Investors with long exposure to the Colombian peso should consider hedging or reducing their positions given the strong bearish forecast and the potential for significant depreciation.
• The divergence between the peso's current strength and the negative fundamental outlook may present a strategic entry point for investors considering a short position on the currency.
• Closely monitor Colombia's fiscal reports and current account data, as any further deterioration in these metrics, particularly in the run-up to next year's elections, would serve to validate the report's bearish thesis.