Marco Aquino, Benjamin Mejias

LIMA (Reuters – Peru’s Sol currency plunged in 2017 due to political risks. Analysts and traders believe that it will rebound so strongly in 2022, and is likely to continue strengthening as prices rise and interest rates rise.

This month’s currency has increased more than 2 percent against the dollar, reaching its highest level since Pedro Castillo (an outsider) was elected president of the no.1 country in the world. 2 copper producer last July.

The Sol fell over 10% last year to record levels against the US dollar, making it one of Latin America’s most disappointing performers.

Although there are still potential disruptions to the system, it is now more optimistic due to the recent rise in interest rates, stronger dollar and strong commodity prices. There’s also a brighter outlook on government income taxes.

Hugo Perea is chief Peru economist at BBVA (MC-) Research. “This structural factor is that there’s a lot inflow of dollars from exports.” “Monetary Policy also appears to be rapidly moving towards neutrality.”

Peru’s interest rate has risen for six consecutive month, rising to 3% last Wednesday. This cycle is likely to go on as the central bank tries to control inflation. Higher rates promote savings and investments.

Asvim Asencios is a Renta4 SAB Peru currency trader. “I think that the major factor that would benefit the exchangerate is if there are no increases in the benchmark interest rates,” he said.

Six analysts and traders Reuters interviewed predicted that the sol would rise to 3.8 dollars this year, from its current high of 3.9 USD seven months ago. One forecasted that it would decline to 4.15 cents per dollar. Sixth was neutral.

POLITICAL UNKNOWN

Although analysts believe that technical factors are more important than political factors for the time being, they caution investors not to be too optimistic.

Castillo is an relative moderate in a radical Marxist party. He’s fighting a fractured Congress and ongoing protests within the mining sector. There is also an investigation into corruption and influence-peddling.

“This year there are regional elections, which could lead to more radical groups taking over Peru’s political map. Perea stated that it would have an impact on the sol. She added, “Institutional checks are currently containing populist and radical outbursts.”

With an expected injection of tax dollars in March, rising global copper prices may also help to offset political volatility.

A currency trader from a local bank said that “we saw mining companies selling dollars practically up to the last day last year in an environment where the exchange rate seemed attractive.”

A currency trader stated that non-mining companies also have “enough dollars” in their portfolios and balance sheets.

The October low for the sol was 4.138 per dollar.

The central bank was able to decrease intervention on the market after local demand began to decline in December.

“What we are seeing right now is a recomposition of portfolios,” said Eduardo Jiménez, head of the information systems at Lima-based consultancy Macroconsult.

People are realizing that an exchange rate between 4.0 soles and a dollar is impossible with these fundamentals.”

Peru: Rising sol? https://tmsnrt.rs/3zM6U2g

Peru: Rising sol? (Interactive graphic) https://tmsnrt.rs/3qikbg1

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