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Goldman Sachs Revise USDPEN Forecasts Lower

PERU
  • Given the potential for further enthusiasm for LatAm FX, and the potential for copper prices to break out of their recent range, GS are shifting their USD/PEN forecasts lower to 3.75, 3.70 and 3.70 in 3, 6, and 12 months respectively (from 3.95, 3.90 and 3.85 previously).
  • A number of forces have been behind recent outperformance: first, along with its LatAm FX peers, nominal FX carry in PEN has been driven higher by rapid rate hikes: in particular, FX carry in PEN has appeared to rise ahead of each hike delivered by the MPC, so that 12-month nominal carry in the Sol is now higher, on average, than some ‘high carry, low vol’ currencies in Asia (IDR, INR and PHP), and is now nearly as high as in the significantly higher-vol Rand.
  • While the MPC this month has adopted a more data-dependent stance, this rebuild in nominal FX carry in PEN can continue if rising inflation warrants further policy rate hikes. More recently, consistent with GS empirical work, which shows a significant ‘beta’ of PEN to the copper price, the Sol benefited (along with CLP) from fresh data showing continued strong credit growth in China that contributed to a rise in copper prices.
  • Updated metrics suggest that most of the Castillo-tied political risk has now been priced out, with risk premium in PEN looking closer to 4% from 15% in July ’21.
  • GS measures suggest more risk premium remains priced in CLP, BRL and COP compared to PEN and MXN, which is consistent with the large uncertainty associated with upcoming Constitutional Convention in Chile, and upcoming elections in Brazil and Colombia.
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