Hopes that the latest political drama in Colombia will cause President Gustavo Petro's reform agenda to stall have sparked a rally in the country’s financial markets this week. But with the current account deficit still large, Colombia remains vulnerable to a renewed deterioration in risk appetite and we think that the peso will give up some of its recent gains over the rest of this year. Meanwhile, the broad based decline in inflation across the region in May opens the door to interest rate cuts over the coming quarters. But we doubt that rates will fall by as much as many anticipate this year and next.
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