Colombia’s gross domestic product rose by 2.3% year on year in the fourth quarter.
This was below the 3.1% increase expected.
With Colombia’s economy growing much slower than anticipated, we should anticipate a weakening of the Colombian peso against the US dollar. The 2.3% figure, a significant miss from the 3.1% forecast, signals underlying economic fragility. This will likely push the USD/COP exchange rate, currently near 4,150, towards the 4,300 level seen in late 2025.
This poor growth data puts significant pressure on the Banco de la República to consider cutting interest rates sooner than planned. Despite inflation remaining sticky at 5.9% in January, the central bank cannot ignore a slowdown of this magnitude. Traders should therefore look at interest rate swaps that position for a drop in short-term rates by mid-year.
For currency traders, buying call options on the USD/COP is the most direct play on this news. Options with strike prices around 4,250 and 4,300 for April and May expiries offer a way to profit from the expected peso depreciation. We saw a similar dynamic in the third quarter of 2023 when a growth scare caused a rapid 4% devaluation of the peso over the following six weeks.
On the equity side, the MSCI COLCAP index is vulnerable as slower growth translates to lower corporate earnings expectations. We should consider buying put options on the index to hedge against a potential decline toward the 1,300 support level. The consumer discretionary and industrial sectors are likely to be hit the hardest by this slowdown.
The surprise nature of this data miss means implied volatility is likely to rise across Colombian assets. The VIX equivalent for the COLCAP has already ticked up from 18% to 21% in early trading. This environment favors strategies that profit from increased market swings, not just a one-way move.
