Peru: Sol weakens in April to lowest level in one year
May 17, 2013
On 30 April, the Peruvian sol (PEN) traded at 2.64 per USD, which was 2.1% weaker than the last day of the previous month. As a result, the sol returned to the levels seen a year ago.
Following an almost uninterrupted upward trend since May last year and after the currency touched its highest level in over 15 years in December, the weakening of the of PEN against the greenback in April partly reflects short term factors such as higher demand for dollars, but also the government's announcement of plans to strengthen the control over state-owned PetroPeru and its intention to buy a stake of assets of Spanish oil firm Repsol. However, the Peruvian sol appears set to appreciate again and, by 17 May, the PEN traded at 2.62 per USD, as the country's strong fundamentals propel the local currency.
The Central Bank has heavily intervened in the foreign exchange market to stem the gains of the sol. Despite being absent since 19 April, the Bank has purchased USD 5.2 billion in the last four months, which comes on top the USD 13.9 billion purchased in 2012. In addition, the Central Bank has taken other measures such as increasing the average reserve requirement ration both for local and foreign currency deposits in order to stem the impact of capital inflows from abroad on the expansion of credit and, consequently, on the appreciation of the local currency.
Economists polled by FocusEconomics Consensus Forecast expect the sol to strengthen in the coming months and trade at 2.55 PEN per USD by the end of the year. For 2014, the panel projects that the sol will close the year at 2.53 PEN per USD.
Author: Ricardo Aceves, Senior Economist