CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
US English

USD/PEN forecast: Peruvian sol under pressure as political chaos turns economic outlook negative

By Nicole Willing

Edited by Vanessa Kintu

17:46, 23 December 2022

Stack of Peru sol notes with a calculator
The nuevo sol used today was launched in 1991 – Photo: RODWORKS / Shutterstock

The Peruvian sol (PEN) has edged up against the US dollar (USD) in the past two weeks after a cabinet reshuffle and a date was set for early elections, following the ousting of the country’s president earlier this month.

The PEN has gained around 3.3% against the USD since 7 December, when the currency dropped by 4.4% in a day as Peruvian President Pedro Castillo was removed from office for attempting to dissolve Congress and rule by decree ahead of imminent impeachment proceedings in what was viewed as a self-coup d'état.

On 21 December, Peru’s Congress voted to bring forward general elections to April 2024 from 2026, and ease political unrest in the wake of Castillo’s arrest. 

Dina Boluarte, who had been Castillo’s vice president and was sworn in after his removal, announced a partial cabinet reshuffle on 22 December. The caretaker government is facing increasing tensions with other government leaders in Latin America who support Castillo.

What impact will the political uncertainty have on the Peruvian currency over the next year? In this article we look at the drivers for the USD/PEN exchange rate and the latest forecasts from foreign exchange (forex) analysts.

What drives the USD/PEN exchange rate?

In forex (FX) markets, currencies are always traded in base/quote pairs to determine their value. The USD/PEN pair refers to how many Peruvian sol one US dollar can buy. The USD is the base currency and the PEN is the quote currency.

The Peruvian sol was established as the official currency of Peru 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 used today was launched in 1991 to replace the inti at a rate of 1m inti to 1 nuevo sol. Peru’s central bank, the Banco Central de Reserva del Perú (BCRP), issues the currency.

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

Peru is the world's second-largest producer of copper, silver and zinc, and the largest gold producer in Latin America. Conflicts between mining companies and local communities have disrupted production several times in 2022.

What is your sentiment on DXY?

103.945
Bullish
or
Bearish
Vote to see Traders sentiment!

PEN remains volatile on political instability

The PEN has lost around 11% of its value against the US dollar since the start of the Covid-19 pandemic. The exchange rate moved up from a rate of 3.31 in January 2020 to 3.80 on 22 December. It peaked at 4.14 in October 2021.

The pair has become increasingly volatile in 2022. The PEN strengthened in the first quarter of 2022, bringing the pair to 3.62 in early April. 

The USD/PEN climbed to 3.96 in July as the dollar rallied, then traded down to 3.76 in mid-August on a brief bout of dollar weakness, stabilising in that range until late September, when it moved up to 3.98.

The USD/PEN dropped sharply from 3.94 in late October to around 3.80 in mid-November as the dollar began to weaken at the prospect of a more dovish turn in the US Federal Reserve’s (Fed) monetary policy. The exchange rate was then stable until December’s volatility.

The political developments on 7 December overshadowed the BCRP’s decision to raise its key policy interest rate by another 25 basis points (bps) to a two-decade high of 7.5%. The BCRP has raised rates several times this year from 0.5% in August 2021.

As in other countries, the central bank has been raising interest rates from close to zero in an attempt to slow the rate of inflation, as well as constrain wages and support its currency. Inflation in Peru increased to 8.45% in November from 8.28% in October, remaining well above its 1% to 3% target.

GBP/USD

1.29 Price
-0.290% 1D Chg, %
Long position overnight fee -0.0046%
Short position overnight fee -0.0036%
Overnight fee time 21:00 (UTC)
Spread 0.00170

EUR/USD

1.09 Price
-0.100% 1D Chg, %
Long position overnight fee -0.0087%
Short position overnight fee 0.0005%
Overnight fee time 21:00 (UTC)
Spread 0.00018

USD/JPY

157.52 Price
+0.080% 1D Chg, %
Long position overnight fee 0.0108%
Short position overnight fee -0.0190%
Overnight fee time 21:00 (UTC)
Spread 0.040

AUD/USD

0.67 Price
-0.330% 1D Chg, %
Long position overnight fee -0.0066%
Short position overnight fee -0.0016%
Overnight fee time 21:00 (UTC)
Spread 0.00030

The BCRP revised down its 12-month inflation expectations from 4.78% in October to 4.68% in November, but has revised up its forecast for 2023 to 4.4%, from an earlier revision from 2.5% to 3%.

Inflation in the US moderated to 7.1% in November from 7.7% in October and a peak of 9.1% in June, pointing to the potential for the Fed to slow the pace of US interest rate hikes. 

The Fed lifted its benchmark rate on 15 December by 50 bps after four consecutive 75-point hikes. That has resulted in a retreat in the value of the US dollar, proving some support to the sol through the current political instability.

What does this mean for the value of Peru’s currency against the dollar? What is a realistic US dollar to Peruvian sol forecast for 2023?

USD/PEN forecast: Expectations for 2023 and beyond

The recently appointed Dina Boluarte is Peru’s sixth head of state since 2018, analysts at Swiss bank UBS noted, as “political uncertainty looks likely to remain high for the foreseeable future”. The bank’s analysis continued: 

“During times of heightened political uncertainty, it is helpful to reassess the strength of a country’s economic picture. In our view, the numbers for Peru remain relatively strong, which should offer resilience to Peruvian assets through the current crisis.”

Peru has a combination of low government debt and strong economic institutions that have delivered prudent fiscal and monetary policy. The country also has high international reserves relative to the size of its economy and a moderate current account deficit financed by large inflows of net foreign direct investment. 

“We think Peru can withstand a prolonged period of tight global liquidity relatively comfortably, in contrast to other Andean countries such as Colombia and Chile which appear more vulnerable in our view,” the UBS analysts stated. 

“Peruvian assets reacted negatively to the developments at first, but they staged a recovery after Castillo was ousted. The Peruvian sol traded close to flat relative to the US dollar.”

Analysts expect the USD/PEN exchange rate could return to the 4 level by the end of 2023.

“The local currency will exhibit some weakness in 2023 in an environment of greater global risk perception (marked slowdown in worldwide growth) and a narrowing of the interest rate differential between soles and USD, which will reduce the appetite for emerging markets assets,” according to the USD/PEN forecast for 2023 from BBVA Research.

“We expect that, after ending 2022 between 3.85 and 3.95 soles per USD, the exchange rate will end 2023 between 4.00 and 4.10 soles per USD. Later, amid a global economic rebound and the current account deficit moving back toward more sustainable levels, the exchange rate will close 2024 at a level not much different from the previous year.”

The USD/PEN forecast from Canada’s Scotiabank indicates that the pair could trade around 3.90-3.99 over the next two years.

For the longer term, the USD/PEN forecast for 2025 from algorithm-based forecaster Wallet Investor suggests that the rate could rise to 4.226 by the end of the year, up from 3.99 at the end of 2023.

 BBVA ResearchScotiabank
Q4 2022-3.95
Q1 20233.843.99
Q2 20233.903.95
Q3 20233.953.90
Q4 20233.983.95
Q1 20243.953.90
Q2 20244.003.95
Q3 20244.063.90
Q4 2024-3.95

At the time of writing (23 December), the USD/PEN prediction from Trading Economics estimated that the pair could rise from 3.88 at the end of this quarter to 4.06 in a year, based on its global macro models and analysts’ expectations.

Research firm Fitch Solutions has taken the view in its USD/PEN forecast that the sol is likely to continue holding up well next year, given greater investor confidence in its economic policy stability.

With the currency markets particularly volatile in the current environment, analysts have yet to issue a USD/PEN forecast for 2030.

When consulting any USD/PEN forecast, keep in mind that high volatility makes it difficult for analysts and algorithm-based forecasters to come up with accurate long-term predictions. Their predictions can be wrong.

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. Remember that past performance is no guarantee of future returns. And never invest money you cannot afford to lose.

FAQs

Why has USD/PEN been dropping?

The Peruvian sol has moved up against the US dollar as Peru’s government has moved to call early elections, after the currency dropped when President Pedro Castillo was removed from office earlier in December.

Will USD/PEN go up or down?

No-one knows. The direction of the USD/PEN exchange rate could depend on how the political crisis in Peru unfolds, as well as monetary policy from the central banks in Peru and the US.

When is the best time to trade USD/PEN?

The best time to trade on forex markets is around the release of major economic announcements, such as trade data, inflation and interest rates.a

Is USD/PEN a buy, sell or hold?

How you trade the USD/PEN pair is a personal decision depending on your risk tolerance and investing strategy. You should do your own research to take an informed view of the market. Remember that past performance is no guarantee of future returns. And never invest money you cannot afford to lose.

Related topics

Rate this article

Related reading

The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
Capital Com is an execution-only service provider. The material provided in this article is for information purposes only and should not be understood as investment advice. Any opinion that may be provided on this page does not constitute a recommendation by Capital Com or its agents and has not been prepared in accordance with the legal requirements designed to promote investment research independence. While the information in this communication, or on which this communication is based, has been obtained from sources that Capital.com believes to be reliable and accurate, it has not undergone independent verification. No representation or warranty, whether expressed or implied, is made as to the accuracy or completeness of any information obtained from third parties. If you rely on the information on this page, then you do so entirely at your own risk.

Still looking for a broker you can trust?

Join the 630,000+ traders worldwide that chose to trade with Capital.com

1. Create & verify your account 2. Make your first deposit 3. You’re all set. Start trading