Be Careful of the Colombian Peso Carry Trade

A financial strategy commonly used in foreign exchange markets is driving up the Colombian peso versus the US dollar. It offers great profit potential but also has serious risk for unwary currency traders and investors. After reviewing the situation and considering the history and nature of politics and popular uprisings in Colombia, our advice is to be careful of the Colombian carry trade. Here is our thinking on the subject.

What Is a Carry Trade?

The use of the carry trade goes to the heart of capitalism. One borrows money in a currency with low interest rates, converts to a currency with higher interest rates and invests or loans out the money for a tidy profit. As noted by Britanica Money, this strategy can be very profitable when it works out and devastatingly and rapidly painful when it does not. A key problem is knowing when to get out and not getting trapped in a trade that one cannot unwind. The unbridled optimism we see with folks pouring into this strategy is worrisome due to political and social considerations in Colombia, the country at the far Northwest corner of South America from where much of the world’s best coffee comes as well as coal, oil, cut flowers, and precious metals.

Courtesy of Bloomberg

What Prompted the Colombian Peso Carry Trade?

High Colombian interest rates and fiscal optimism are driving the Colombian peso carry trade according an informative article by Bloomberg. There is a change of president coming up in Colombia. Colombia has had a socialist president for the last four years, Gustavo Petro. Mr. Petro’s term expires August 7 of this year. Under Colombian law a president serves one four year term and can never run again. The candidate who won the election to be the next president is Abelardo de la Espriella. Mr. de la Espriella does not have a political party and is an outsider. He is both a US and Italian citizen although born in Colombia, a registered Republican in the USA, and a successful lawyer and businessman. He ran a successful political campaign promising to be tough on crime and to send the military after drug dealing guerillas scattered throughout the country. He gathered support from business leaders by promising the building of ten mega prisons, cutting government spending by forty percent, “broadening” the tax base, and instituting “anticorruption” measures in both governmental and public institutions. He also promises a conservative anti-abortion, no gay marriage, or adoption agenda. De la Espriella beat Ivan Cepeda, a socialist senator, by less than one percent of the vote in a runoff election and together both he and Cepeda received eighty-seven percent of the votes amount thirteen candidates in the first round of ballots.

Will the Colombian Peso Carry Trade be Profitable When the New President Is in Office?

The Colombian peso carry trade is based on the assumption that interest rates will remain high in Colombia and that de la Espriella will be able to enact policies that lead to economic success. There are a few issues to be concerned about if you are cheering for him. The incoming president founded and leads the Defenders of the Homeland party which is totally new. The new party holds no seats in either the Senate or the House of Representatives. The largest Colombian political party representation in a system split among five different parties is the Pacto Historico which is the party of still president Petro and the second place finisher, Ivan Cepeda. The rest of the seats are split among the green alliance, conservative party, liberal party and central democratic party. The bottom line here is that the new president will need to go hat in hand begging for votes for any programs and funding that he wishes in the coming months.

Image Courtesy of the Bogota Post

How Will Espriella’s Presidency Work Out?

Going into th e 2026 presidential election voters in Colombia were tired of attacks by guerilla attacks in rural areas, the fact that cocaine production is many times higher than during the time of Pablo Escobar as well as having to live with steadily increasing inflation. A couple of items from recent Colombian history are instructive in regard to what to expect if de la Espriella is too ham handed. The first goes back to the Covid Pandemic when folks were unable to work, buy food and pay rent. The government responded by handing out parcels of food in the barrios. The solution was not perfect but helped a lot. Then President Duque assigned the job of paying for all of the expenses of the pandemic to his treasury secretary who proposed reducing the monthly 877,803.00 COP (less than $300 USD) minimum wage and putting taxes on the purchase of beans and rice, the staples of a poor or average Colombian family along with increased taxes on utilities. The result was rioting throughout country, extensive property damage, many deaths and the eventual patrolling of streets in previously tranquil cities like Manizales on the western edge of Andes with military patrols with M-16s and live ammo! The tax increases were never enacted but it was a lesson in just how much economic pain and hardship the Colombian populace will put up with before reacting. When de la Espriella talks now about “broadening the tax base” we think about taxes on beans and rice and riots throughout Colombia!

Will Colombian Drug Lord Guerillas Fight Back Like Escobar Did?

The most infamous of Colombian drug lords was Pablo Escobar who became a multibillionaire in the 1980s. When the Colombian government tried to crack down on his activities and signed an extradition treaty with the USA Don Pablo and his Medellin drug cartel declared war. High government officials were assassinated along with hundreds of police officers, dozens of judges and as many as five thousand innocent bystanders. Economically, his war caused billions in infrastructure damage, loss of Colombian credit in global markets and convinced foreigners that investment in Colombia would be dangerous. It took nearly two decades for Colombia to recover from the war between the government and the leading drug lord. Mr. de la Espriella as well as folks in love with the current Colombian peso carry trade need to be mindful of this before the new president goes to war with well-armed guerillas backed by billions in cocaine and other drug profits!

What to Look Out for Regarding a Colombian Peso Carry Trade

There was a lot of pent up dissatisfaction with Petro’s slow walking talks with guerillas in the rural areas who did not follow the example of FARC, the largest antigovernment rebel group what agreed to a peace treaty in 2016. The fact that Colombia’s cocaine production keeps setting records, the folks making money from this business keep murdering people to maintain control of their production areas. However, that general opinion could easily change if an all-out war with guerillas breaks out.

The rationale for the carry trade using the Colombian peso is that de la Espriella’s presidency will help Colombia’s economy, eradicate the drug trade in Colombia without an all-out war or economic collaps, and maintain high interest rates. Much of de la Espriella’s agenda will require gaining allies in both branches of the legislature. This will be difficult but will not play out rapidly. It will take some time to see if he has any success, which will give those in carry trades time to get out if the trade gradually becomes unprofitable. Civil unrest if the new president screws up and makes the population angry or an all-out war with drug dealing guerillas could happen rapidly and would potentially cause traders to trapped in devastatingly unprofitable carry trades. Either way anyone intent on continuing this currently profitable trading and investing strategy needs to pay attention and remember that the Colombians themselves will have a vote in how all of this works out!