• Morgan Stanley, Citigroup mention possible dollar purchases
  • Currency trading at strongest level since last November

Peru’s central bank has been contacting local traders to test the waters on a possible intervention in the market after the sol reached its strongest level since November, according to Morgan Stanley and Citigroup Inc.

The central bank is considering buying dollar swaps in a sign to the market that it wants to slow down the appreciation of the sol -- which means sun in Spanish -- and calm volatility, Citigroup said in a note to clients Tuesday. Morgan Stanley also mentioned talks of an intervention in a note to clients.

The sol has strengthened 0.1 percent to 3.33 percent as of 9:45 a.m. in Lima, trimming an earlier gain of 0.4 percent, according to prices provided by Datatec, the strongest level for the currency since last November. So far this month, the sol has gained 5.7 percent, on course for its first monthly appreciation in almost two years.

"For a market of the size of Peru’s the moves are quite out of the normal," said Alejandro Cuadrado, head of Latin America FX strategy at Banco Bilbao Vizcaya Argentaria SA in New York. "We’ve seen flows entering the Peruvian market, which have been compounded by low liquidity."

Normal volume for the sol spot market is about $400 million per day and Monday volume was about half that number, Cuadrado said.

Morgan Stanley expects the Andean currency to weaken, but is waiting to see if the central bank acts before selling the sol against dollars, it said in the note. Currency intervention would be a “huge” sign as the monetary authority has been selling dollars and buying swaps since October 2014 to tame volatility, Morgan Stanley said.

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