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Peru sol forecast: PEN feels pressure of political uncertainty, mining sector struggles

By Nicole Willing

Edited by Vanessa Kintu

11:19, 13 October 2022

Peruvian sol notes spread out with a calculator, pen and notebook
The Peruvian nuevo sol was introduced in 1991 Photo: RODWORKS / Shutterstock

Like other emerging markets currencies, the Peruvian nuevo sol (PEN) has weakened against the US dollar (USD) this year, contributing to high inflation and increasing demand among the population for US dollars.

Will the PEN continue to decline in value? How will the sol perform against other currencies? In this article we look at the drivers for the exchange rate and the latest PEN forecast outlook.

What drives the value of the PEN?

The sol was introduced as Peru’s official currency in the 1860s. It was replaced when Chile occupied the country but was reintroduced in the 1930s. The sol was replaced by the inti in the 1980s during a period of high inflation. 

The nuevo sol was introduced in 1991 to replace the inti at a rate of 1m inti to 1 nuevo sol. The currency is issued by the Banco Central de Reserva del Perú (BCRP).

As Peru is a key net exporter of commodities such as copper, gold, zinc and chemicals, the value of its currency is influenced by commodity prices, trade balances, mining and industrial production and employment rates, as well as the government’s policies on interest rates and inflation.

Peru is currently faced with high unemployment caused by the Covid-19 pandemic and volatile copper prices, along with high inflation.

The country is also dealing with disputes in its mining sector, a key economic driver that accounts for 60% of  exports. Peru is the world's second-largest producer of copper, silver and zinc, and the largest gold producer in Latin America. 

Conflicts with local communities and protests have disrupted mining operations several times this year. The government’s vice minister for mining said on 30 September that it will make regulatory adjustments to improve the relationship between mining companies and communities.

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Peru sol price history

PEN/USD 5-year price chart

The value of the sol has plunged by around 20% against the dollar since the start of the pandemic, from a foreign exchange (forex) rate of 3.31 in January 2020 to 3.97 on 12 October. The USD/PEN pair peaked at 4.14 in October 2021. 

However, it has been more volatile in the past year, with the PEN strengthening during the first quarter of 2022 to reach 3.62 in early April. The pair climbed to 3.96 in July as the dollar rallied, then traded down to 3.76 in mid-August, stabilising in that range until late September, when it moved up to 3.98.

The BCRP reported that Peru’s inflation rate in August was 8.41%, compared with its 1-3% target. Inflation in the US in August was 8.5%, while in Brazil it reached 10.07%. 

The central bank has raised its inflation forecast for 2022 to 7.8%, from 6.4%, and for 2023 to 3%, from 2.5%, putting it back within the target range next year. It also revised down its economic growth forecast for 2022 to 3%, from 3.8%, and for 2023 to 3%, from 3.2%.

As in other countries, Peru’s central bank has been raising interest rates in an attempt to slow the rate of inflation, as well as constrain wages and support its currency. The BCRP raised its key policy rate to 6% on 7 July. It was at 0.50% in August 2021. On 6 October, it raised the rate again by another 25 basis points to a two-decade high 7%.

The BCRP’s growth projections reveal the precariousness of the political-economic situation. It revised its economic growth estimates for the current year downward from 3.8% to 3.0% for 2022 and from 3.2% to 3.0% for 2023.

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While the PEN has lost value against the USD amid the rapid rise in US interest rates and safe haven demand for the dollar, it has gained value against other currencies such as the euro. 

The EUR/PEN exchange rate has declined by 18% in the past year, from 4.71 to 3.85. The euro has weakened more than the PEN with Europe’s economies under pressure from the ongoing energy and geopolitical crisis caused by the Russia-Ukraine conflict.

What is the outlook for the PEN? How is it expected to trade against the US dollar and euro? Let’s look at the latest Peru sol forecast from analysts.

USD/PEN forecast

Persistent US dollar strength is expected to continue, which is likely to see the USD/PEN rate rise further.

“The Peruvian currency will tend to weaken in the coming months due to the fact that the interest rate differential between soles and dollars will decrease in a more risk-adverse global environment, while the current account of the balance of payments will register some additional deterioration and the conditions to finance this external deficit will be more challenging,” according to BBVA Research’s Peru sol forecast for 2022.

“In this scenario, the Peru Situation report indicates that the exchange rate will end 2022 between 3.90 and 4.00 soles per dollar, while in 2023 it will be between 4.00 and 4.10 soles per dollar.”

Mike Moran, analyst at Spanish multinational bank Santander, noted in the bank’s latest Peru sol forecast: 

“The backdrop for EMFX remains challenging following its deterioration over the past quarter, in conjunction with a significant adjustment in US and (increasingly) global rates expectations and their implied growth risks. While we have underscored the PEN’s ‘low beta’ characteristics in previous updates, that does not mean it is immune to growing risks of a global demand slowdown, a theme that we expect to dominate for the rest of the year. Thus, the 4Q outlook for the PEN points to further moderate depreciation pressures versus the USD, back towards the 4.0-4.05 range. This would effectively bring USD/PEN back to last January’s levels after briefly testing below 3.65 in April, coinciding with the year’s high in copper prices.

“Another risk for the PEN in 4Q is the likelihood of BCRP reaching the end of its current tightening cycle, at a time when the Federal Reserve (and more global central banks) are still firmly mid-cycle, further narrowing policy rate differentials,” Moran added.

The Peru sol forecast from Trading Economics estimated the USD/PEN pair could trade at 4.00338 by the end of this quarter and 4.18483 in one year, based on global macro model projections and analysts’ expectations.

But analysis by Canadian bank CIBC expected the pair to remain below the 4.00 mark. The bank’s PEN/USD forecast shows the pair ending the year at 3.95 and then moving up to 3.99 by the end of the first quarter of 2023 before dropping back to 3.95 in the second quarter and 3.90 in the third quarter, ending 2023 at 3.95.

EUR/PEN forecast

The EUR/PEN forecast from Trading Economics projects that the sol will trade at 3.84199 against the euro by the end of this quarter and at 3.84622 in one year.

The PEN prediction from algorithm-based forecasting service Wallet Investor had the sol continuing to rise against the euro into 2023. EUR/PEN could end 2022 at 3.826 and the first quarter of 2023 at 3.779. But the euro could then turn higher, reaching 3.941 by the end of next year. 

Wallet Investor’s Peru sol forecast for 2025 projects that the pair could rise to 4.18 by the middle of the decade and 4.287 in five years’ time. Analysts have yet to issue a Peru sol forecast for 2030.

If you are looking for a Peru sol forecast to inform your forex trading, it’s important to remember that currency markets are highly volatile, making it difficult for analysts and algorithm-based forecasters to come up with accurate long-term predictions. 

We recommend that you always do your own research. Look at the latest market trends, news, technical and fundamental analysis, and expert opinion before making any investment decision. Keep in mind that past performance is no guarantee of future returns. And never invest money you cannot afford to lose.

FAQs

Will the Peruvian sol get stronger in 2022?

The strength of the PEN against other currencies such as the US dollar and euro could depend on commodity prices, interest rates and inflation in Peru and the US.

Will the Peruvian sol rise?

The direction of the PEN could depend on the relative performance of other currencies, it has been declining in value against a rallying US dollar but gaining value against the euro.

Is it a good time to buy Peruvian sol?

Whether it is a good time for you to buy PEN for your investment portfolio is a personal decision depending on your risk tolerance, investing strategy and time horizon. You should do your own research to take an informed view of the market.

We recommend that you always do your own research. Look at the latest market trends, news, technical and fundamental analysis, and expert opinion before making any investment decision. Keep in mind that past performance is no guarantee of future returns. And never invest money you cannot afford to lose.

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