The dollar succumbed against the Peruvian sol by 1.97% in the last five sessions, the most notable weekly decline in 2022. Likewise, registered the lowest price of these first 44 days of the year and from the Castillo era when it reached S/ 3,740.
Experts and the Central Reserve Bank of Peru (BCRP) highlight that factors such as the Peruvian macroeconomy, financial technical decisions and the political environment are behind the lowering of the greenback.
According to Bloomberg, the Peruvian sol ranks as the second best performing currency among emerging economies after appreciating 5.6%.
solid fundamentals
“On the economic fundamentals side, there are reasons to think the sun could be stronger,” warned this Friday Adrián Armas, central manager of Economic Studies of the BCRP, emphasizing that the external environment is favorable for the Peruvian economy as it is purely an exporter.
In 2021, according to BCRP estimates, the trade surplus amounted to US$ 14,752 million thanks to the sustained increase in the international price of copper, gold and zinc in response to the super cycle of minerals that has existed since 2020. For their part, the terms of exchange had an average annual increase of 11.8%, the highest growth rate in the last eleven years. This expansion was due to the rise in export prices, whose increase was 30.3%.
”Commodity prices strengthen our currency. 63% of our exports are minerals; thus, copper represents 33% and gold 16%, that is, 49% of the total”, said Arturo García, professor of Finance at ESAN Graduate School of Business.
Increased referral fees
The process of raising benchmark rates of the different central banks in the region that began in mid-2021, as a measure to counteract inflation, has also been a point in favor of Latin currencies; before the expectation of the rise that the Federal Reserve (FED) will take next March.
”Latin American central banks have reacted significantly with strong rates, but there has been an upward cycle that is expected to continue in the coming months to make inflation converge back to the target range (between 1% and 3%). For this reason, the market has seen this policy in recent weeks that has had an impact on the exchange rate,” said Dario Valdizán, director of Buy Side Research at Credicorp Capital Asset Management.
Peru has applied seven increases to the rate since August 2021 and already adds 3.50%. Our neighbors like Chile have increased their rate to 5.5%; Colombia raised it to 4%; the rate in Brazil reached 10.75%. In North America, the Mexican reference rate amounts to 6%.
Annualized inflation in the United States reached 7.5%, what has been the blow of the week for the world’s leading economy. This would have added urgency to the Fed’s plans to start raising interest rates, which have remained between 0% and 0.25% since 2020. Economic agents suggest that the increase be 50 basis points, while Goldman Sachs foresees that the hikes will be seven and no longer five.
”While there are fundamentals, on the other hand, in international markets there is a lot of uncertainty regarding the movement of central bank rates. In this context, it will depend on what force prevails in the short term in the exchange rate,” he replied. Weaponsafter being consulted about the situation.
Discounted Political Risk
Participating specialists agreed that part of the political risk has been discounted by the market, since the Executive has not outlined an agenda that worries investors.
“At the beginning of this government, the decisions made suggested a rather worrying scenario and it generated mistrust that was fueled by a political ideology that the president’s party had,” Valdizán said.
Thus, the exchange rate registered its most critical point in October 2021 in the face of the crisis caused by Guido Bellido. With the arrival of Mirtha Vásquez, the dollar fell slightly. While Aníbal Torres has said that he will bet on the social market economy.
Keys for Latin America and the world
This Wednesday the 16th, in the US, investors will analyze the minutes of the January meeting of Fed officials and thus gauge the appetite of central bankers for an aggressive approach to the standardization about politic.
European Central Bank President Christine Lagarde warned that tightening monetary policy would hurt the rebound of the bloc’s economy. The main data in the euro zone will be the industrial production for December that will be published this Wednesday.
Brazil will know inflation figures. Argentina publishes its national CPI figures on Tuesday. While in Peru, the 2021 economic activity report will be published along with labor market metrics.
Data
Overwhelming. The value of copper exports, between January and November 2021, amounted to US$ 18,863 million. China is the main recipient of Peru’s copper exports with a 70.4% share.
Safe surplus. The BCRP projections for the trade surplus in 2022 and 2023 are US$15,588 million and US$16,315 million, respectively.
Reaction
”On the side of economic fundamentals, there are reasons to think that the sun could be stronger (…). On the other hand, there is uncertainty due to the rise in rates by central banks”.
Adrián Armas, central manager of Economic Studies of the Central Reserve Bank of Peru
Source: Larepublica
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