Peruvian 'Sol' shines again, is region's most stable currency

Stability refers to the fact that the daily fluctuations in the exchange rate —upward and downward— are less intense than those of their peers in the region, according to the calculation of historical volatility for the last six months by Bloomberg, said Scotiabank's Deputy Monetary Economics Manager Mario Guerrero.

The officer specified that, in recent times, there has been unusual volatility in the exchange rate due to various factors: political uncertainty after the 2021 general elections; the strengthening of the U.S. Dollar given the uncertainty caused by the Russia-Ukraine conflict; and expectations for interest rate hikes due to higher global inflation in 2022.

However, Guerrero highlighted the fact that the resilient Peruvian economy, which despite recurring shocks is growing more than its peers; the solid external fundamentals; and the recognized management by the Central Reserve Bank (BCR), which led the Peruvian Sol once again to become Latin America's most stable currency.

"The degrees of uncertainty for the rest of 2023 and for 2024 would still remain high, considering the monetary police transition process from a contractive stance to a neutral position, the persistent local political noise —for now of lower intensity— and the latent risks in the international context," he added.

Guerrero argued that Scotiabank projects a lateral exchange rate movement from now on, although in average terms it would maintain a bias towards appreciation. After reaching an average of S/3.90 in 2021, the average dropped to S/3.84 in 2022 and has reached an average of S/3.80 so far in 2023.

"Therefore, our projection for the end of the year, of S/3.85, maintains a downward bias. What we expect for 2024 is that the evolution of Peru's currency reflects the balance of external fundamentals, copper prices in particular, the international trend of the Dollar, the differential between interest rates in (U.S.) Dollars and (Peruvian) Soles, and the will of the BCR to avoid plenty of volatility," he asserted.

Guerrero stated that these factors can generate short-term changes. However, they seem to cancel each other out over time.

"The underlying assumption is that the exchange rate will move further based on markets and fundamentals than domestic political turbulence. Nonetheless, major political events in the country could significantly affect the Sol, as has been the case in the past," he warned.

Last Monday, the exchange rate closed at S/3.6930, which implies an accumulated fall of 2.99%, according to the BCR.