Peru Sol’s Top Forecaster Boosts Estimate on U.S. Rate Outlook

  • Impact of China slowdown already reflected in commodity prices
  • Lee Hardman of MUFG sees sol weakening 3.5% by end of year

The best forecaster for the Peruvian sol is raising his estimate for the currency as expectations fade that the U.S. Federal Reserve will raise interest rates this year.

Lee Hardman, a currency analyst at Bank of Tokyo - Mitsubishi UFG, the best forecaster of the sol in the second quarter, expects it to weaken to 3.4 per dollar by the end of this year, compared to a 3.7 forecast at the start of this year. The sol has strengthened 4.1 percent this year to 3.281 per dollar, according to Datatec prices.

Hardman is now more bullish than most analysts surveyed by Bloomberg as traders price in less than a 30 percent chance the U.S. will raise borrowing costs this year, down from better than 90 percent at the beginning of 2016. Lower rates benefit emerging-market currencies by making their higher-yielding assets more attractive.

"Over the last six months we’ve been gradually scaling back our expectations for sol weakness,” Hardman said. “Incorporating this more dovish outlook for Fed policies has probably been the main reason.”

The sol is also getting support from a rally in prices for Peru’s metal exports amid speculation there will be sustained demand from China, the biggest buyer of the country’s raw materials.

The most bullish sol forecaster surveyed by Bloomberg is Gabriel Gersztein, a Sao Paulo-based markets strategist at BNP Paribas SA. He sees Peru’s currency at 3.25 per dollar at the end of this year -- a revision from 3.45 at the beginning of January.

"One of the mistakes of the market was to consider the level of the Peruvian sol as an overbought level," Gersztein said. "We didn’t agree.”

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