Peru's Sol Volatility Surges Most in Seven Years Before Election

Updated on
  • Widely different candidates tied in race for second place
  • Sol was previously the least volatile currency in the region

Peru’s sol has been more volatile than at any point in seven years as the country heads toward the first round of a presidential election this weekend.

A measure of swings in Peru’s currency has more than tripled since the end of February as candidate Veronika Mendoza, who favors scrapping inflation targets and raising the minimum wage, moved into a statistical tie for second place in this Sunday’s vote. She still has less than half the support of frontrunner Keiko Fujimori, who is promising to battle high crime rates and spur growth through infrastructure development and tax breaks, and is virtually tied in some polls with Pedro Pablo Kuczynski, an ex-finance minister and cabinet chief who is a favorite of investors.

Before Mendoza’s gains in polls, the sol had surged amid a rally in commodities, prompting speculation that the central bank would intervene to avoid sudden price swings. Mendoza’s popularity has grown over the past month amid political turmoil that included two candidates getting barred from running and accusations that the leading contenders attempted to buy votes with food, beer and money. If no candidate gets more than 50 percent support in the first-round election, the top two will meet in a runoff in June.

“We are seeing volatility on the uncertainty of the election,” said Alejandro Cuadrado, a currency strategist at Banco Bilbao Vizcaya Argentaria. “Over the last few weeks there have been occasions when the market was expecting the central bank to step in and that didn’t happen.”

Before the increase in price swings, the sol had been the least volatile currency in the region for the last two years. The currency gained 0.7 percent to 3.375 per U.S. dollar as of 1:30 p.m. in Lima Friday, according to Datatec prices, following its sharpest drop since 2009. The currency gained after a poll for GFK Peru showed Mendoza at 17 percent and Kuczynski ahead with 22 percent.

One-month historical volatility climbed to 12.4 percent, from 3.7 percent on Feb. 29.

Citigroup Inc. this week recommended investors sell the Peruvian sol against the dollar until after the first round of elections on the view that Mendoza’s momentum may carry her past Kuczynski. The risk is that Mendoza loses and the sol rallies. Investors should plan on exiting the trade shortly after the first round, strategist Dirk Will wrote in a note to clients, because Mendoza would have little chance against Fujimori in a second round.

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