2023-05-10 23:44:42
He dollar closed today at S/ 3,671, the lowest record for the year and lower by 1.05% than at the end of April (S/3.71). So far this year, the US currency has fallen 3.57%, after trading at S/ 3.8070 at the end of 2022.
Levels of S/ 3.67, like the one now, have not been observed since the beginning of March 2021, in the run-up to the presidential elections on April 11, 2021, which was won by Pedro Castillo.
Mario GuerreroDeputy Manager of the Economy of the Department of Economic Studies at Scotiabank, expects the exchange rate to fluctuate in a range between S/ 3.63 and S/ 3.66 in the following days. “A technical level of S/ 3.66 has just been recognized, which was one of the lowest records last year. This would be a first historical support level and the next one is S/ 3.63″accurate.
Why does the dollar fall to pre-Castillo levels?
He highlighted that the greater appetite for risk of Foreign investors explains the pressures on the dollar. Behind this are the expectations of possible rate cuts by the Fed, in contrast to what its president Jerome Powell recently pointed out, who mentioned that the monetary pause has not been decided.
However, there are factors that could limit the downside scenario, such as the persistence of local political noise (lower intensity for now) and latent risks in the international context, such as inflation that is not easing.
“There is a behavior of regional appreciation, and it is mainly due to the greater appetite for risk for its assets such as bonds or the stock market. This, in the case of Peru, highlights the importance of other variables such as the price of copper, the interest rate differential (BCR with the Fed), but also political risk. On this last point, the recent results in Chile (victory of the right in the election for the Constituent Convention) add up to understand a lower political risk in the region”he claimed.
The DXY index, which measures the value of the US dollar against a basket of foreign currencies, is down 0.5% for the month and 1.9% for the year.
The better inflation data from the United States consolidates market expectations of a more flexible stance from the Fed in its rates (with more controlled inflation, the probability of more increases is reduced). In particular, inflation in the US went from 5% in March to 4.9% in April (the monthly data was 0.4% matching expectations), the lowest since the fourth month of 2021, and below market expectations for 5%.
Investor expectations
“It is a global correction, driven by economic data in the world’s main economy, the United States, where inflation data came out lower than expected”I note Washington López, economist and CEO of Washington Capital, who also pointed out the moderation of political risk.
The chief economist of BBVA Research, Hugo Pereaargued that it is these expectations that have been reflected in an increase in foreign holdings of local assets (in soles) in recent days, whose greater supply of dollars has pushed that currency down against the local currency, a scenario which could be maintained in the following days, after the publication of the new US inflation data.
However, the decline may be limited if there is new information related to a more hawkish (restrictive) stance by the Federal Reserve.
“We could see somewhat lower levels than now, until this rearrangement of expectations ends. The dollar is basically responding to external factors, particularly that in the second half of the year the rate (of the Fed) begins to be cut, and the vision is reaffirmed with the recent inflation data. On the one hand, considering this scenario, there will be fewer incentives to hold positions in dollars, and a greater appetite for risk towards emerging economies, and this is what has been seen in recent days with the entry of non-resident investors.”I note.
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What does Latinfocus estimate for the end of the year?
According to the latest report of FocusEconomics Consensus Forecast LatinFocus April, the consensus of analysts projects an exchange rate of S/ 3.88 at the end of 2023. In other words, the current levels would not be maintained towards the end of the year. The forecast is S/ 3.85 for 2024.
“We have never seen such a large discrepancy between what the Fed indicates (regarding its rate) and what the markets expect; that means that there is some loss of credibility. We have the vision that there will be no cuts, and the markets are sure that the Fed will cut its rate, despite the fact that it does not indicate that scenario. If the rate doesn’t come down, then there should be a rebound in the exchange rate and assets. Before the next meeting of the Fed there will be another inflation data, and we could have more lights on what is coming”said Hugo Perea.
Data
- The next meeting of the Fed, in which a decision on its interest rate will be made, will be on June 13 and 14. The rate is located in a range between 5% and 5.25%, after the last increase (of 25 basis points) in May.
- The Bloomberg Consensus expects no rate hikes at that meeting.
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