Peru’s Currency Rollercoaster: Why the Sol’s Strength Won’t Last—and What the 2026 Elections Have to Do With It
A surprising trend has gripped Peru’s financial markets: the Sol is currently enjoying its strongest position in five years, falling to S/3,464 against the dollar on October 3rd – a nearly 8% drop year-to-date. But don’t be fooled by this apparent stability. Experts at BBVA Research predict a reversal, forecasting a weakening Sol as Peru heads towards its 2026 elections. Understanding this dynamic is crucial for businesses, investors, and anyone with financial ties to the Peruvian economy.
The Sol’s Recent Rise: A Global and Local Story
The Sol’s recent appreciation isn’t solely a Peruvian phenomenon. A broader global weakness in the US dollar, coupled with Peru’s strong trade surplus and favorable terms of exchange, has fueled its ascent. Essentially, Peru is exporting more than it’s importing, bringing more dollars into the country and increasing the Sol’s value. This positive economic environment has created a ‘nadir’ – a low point – for the exchange rate, unseen since June 2020.
Understanding Terms of Trade and External Accounts
Peru’s robust terms of trade – the ratio of export prices to import prices – are a key driver. Higher commodity prices, particularly for Peru’s key exports like copper, mean the country receives more value for its goods sold abroad. This, combined with a healthy surplus in external accounts (the difference between a country’s inflows and outflows of money), provides significant support for the Sol.
The 2026 Election Shadow: A Looming Uncertainty
Despite the current strength, BBVA Research anticipates the Sol will trade between S/3.50 and S/3.60 by the end of 2025. The primary reason? The approaching 2026 presidential elections. Political uncertainty invariably weakens a currency, and Peru is no exception. As election polls begin to shift and candidate preferences become clearer, the Sol is expected to depreciate.
This isn’t simply speculation. Electoral “noise” – the uncertainty surrounding potential policy changes and political instability – historically impacts investor confidence. Investors tend to move capital to safer havens during periods of political upheaval, increasing demand for dollars and driving down the Sol’s value. The magnitude of this depreciation will directly correlate with the volatility observed in pre-election polls.
Beyond the Elections: A 2026 Rebound?
The forecast isn’t entirely pessimistic. BBVA Research predicts a strengthening Sol in 2026, projecting an exchange rate between S/3.45 and S/3.55 after the elections. This rebound is predicated on two key factors: continued strength in Peru’s external accounts and a normalization of US monetary policy.
As the Federal Reserve (the Fed) potentially lowers interest rates, the attractiveness of US dollar-denominated assets may diminish, prompting capital to flow back into emerging markets like Peru. Combined with Peru’s ongoing trade surplus, this could provide a significant boost to the Sol. However, this positive outlook hinges on the assumption that the post-election period will be relatively stable and that Peru’s economic fundamentals remain sound.
What This Means for You: Navigating the Currency Fluctuations
For individuals and businesses with exposure to the Peruvian Sol, understanding these trends is paramount. The current low dollar value presents an opportunity to reassess debts denominated in US dollars, potentially benefiting those who anticipate a future rise in the exchange rate. However, it’s crucial to remember that currency forecasting is inherently complex and subject to unforeseen events.
Businesses involved in international trade should carefully consider hedging strategies to mitigate currency risk. Monitoring political developments and economic indicators closely will be essential in the lead-up to the 2026 elections. The Peruvian Sol’s journey over the next two years will be a fascinating case study in the interplay between economic fundamentals, global forces, and political realities.
What are your predictions for the Peruvian Sol in the coming months? Share your thoughts in the comments below!
