Morgan Stanley Joins Goldman Sachs in Projecting Weaker Peru Sol

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Peru’s sol, the worst performer among major Latin American currencies in April, isn’t done dropping even as the central bank intervenes, according to Goldman Sachs Group Inc. and Morgan Stanley.

Morgan Stanley recommends betting the currency will decline to 3.2 per dollar, and Goldman Sachs said the sol will weaken to that level in the second half of the year. Disappointing economic growth, persistently large external imbalances and central bank interventions that may have “delayed the unavoidable adjustment” all point to a weaker currency, Goldman Sachs analyst Tiago Severo said in a May 1 research report to clients.

“The currency is falling victim to investors’ gradual reassessment of risks to the domestic macro financial outlook,” Severo wrote.

The sol fell the most in almost three months, sliding 0.6 percent to 3.15 per dollar at the close in Lima, its weakest level on a closing basis since April 2009, according to Datatec prices. It dropped 1.1 percent in April, posting a fifth straight month of losses.

The sol’s decline may be necessary to help improve Peru’s external balances, Morgan Stanley strategists led by Felipe Hernandez wrote Monday.

Peru’s central bank sold $1.2 billion in the currency market last month in a bid to ease declines in the sol. It sold $150 million Monday and issued 300 million soles in currency swaps.

This month, Banco Central de Reserva del Peru began raising reserve requirements on trading of foreign-exchange derivatives to limit volatility.

Foreign Holdings

Foreigners have cut their holdings of sol-denominated bonds, known as Soberanos, to a four-year low of 38 percent compared with a record 58 percent reached in 2013.

Soberanos will probably be among the main underperformers this year in emerging markets given “their reduced liquidity, poor technicals due to high and falling foreign positions and important vulnerabilities to a strengthening dollar,” Morgan Stanley said in the report. The bank still recommends investors maintain a “neutral stance” given attractive valuations.

Sol bonds due 2023 fell 0.03 centimo to 96.56 centimos per sol, the lowest level since March 17. The yield increased 0.01 percentage point to 5.72 percent.

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