© Reuters. FILE PHOTO: A money changer holds Peruvian sol bills in a street in downtown Lima, Peru, December 15, 2017. REUTERS / Mariana Bazo / File Photo
By Benjamin Mejias and Marco Aquino
LIMA (Reuters) – Peru's sol currency, which fell last year due to political risk, is rebounding so far in 2022 and is likely to continue to gain strength, analysts and traders said, as rates rise and prices rise.
The currency is up more than 2% against the dollar this month, at its strongest level since left-wing outsider Pedro Castillo president of the world's No. 2 copper producer last July.
The sol hit a record low against the dollar last year and ended up falling over 10%, one of Latin America's worst performers.
Despite the continued risk of potential political disruption, the outlook has now improved on a series of rate hikes, a weaker dollar, strong commodity prices and better prospects for government tax revenues.
"One structural factor is that there is a lot of dollar inflow from exports," said Hugo Perea, Peru chief economist at BBVA (MC 🙂 Research. "Monetary policy also seems to be moving rapidly towards neutrality."
Peru hiked its interest rate six months in a row, raising it to 3% last week, in a cycle that is expected to continue as the central bank tries to contain inflation. Higher interest rates encourage investment and savings.
"I think the main factor that would help the exchange rate would be if the reference rate continued to rise," said Asvim Asencios, Forex trader at Renta4 SAB Peru.
Out of six analysts and traders Reuters spoke to, four forecast the sol, now at a seven-month high of 3.9 per dollar, would soar as high as 3.8 per dollar this year. One said it would be brought down to 4.15 per dollar. The sixth was on the fence.
Analysts said positive technical fundamentals outweigh policy factors for now, but investors remained cautious.
Castillo, a relatively moderate within a more radical Marxist party, is fighting a fragmented Congress, ongoing protests in the mining sector, and an official investigation into alleged corruption and influence.
"This year we have regional elections and it could be that more radical groups begin to take over the political map of Peru. This would affect the Sol," said Perea, adding, "The institutional controls currently contain populist or radical outbreaks."
Rising global copper prices could also offset political volatility, with a mining tax hike expected in March.
"We saw mining companies selling practically until the last day of last year (in dollars) in a context where the exchange rate looked attractive," a forex trader told a local bank.
Another forex trader said non-mining companies "already have enough dollars on their balance sheets and portfolios".
The sol hit an all-time low of 4.138 against the dollar in October.
Its surge began in December when local corporate dollar demand began to weaken, allowing the central bank to reduce interference in the market.
"What we are seeing now is a portfolio recomposition," said Eduardo Jiménez, director of information systems at Lima-based consultancy Macroconsult.
"People realize that with these fundamentals you can't have an exchange rate of 4.0 soles per dollar."
Peru: rising sol? https://tmsnrt.rs/3zM6U2g
Peru: rising sol? (Interactive graphic) https://tmsnrt.rs/3qikbg1