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The BCRP cut the policy rate by 25bp to 7.50%, the first rate cut since April 2020, and after seven consecutive ‘on hold’ decisions. This equates to a real policy rate cute of roughly 4bp to 4.14%, versus the previous months 4.18% as 12m forward inflation expectations have fallen 21bp MoM to 3.36%. Economic activity has been significantly worse in Peru than in other regions, still the BCRP in its communication has remained cautious, keeping optionality open likely given the backdrop of El Nino and political uncertainty.
Local market takeaway
- In FX: We still expect the PEN to be driven by external factors, such as core yields and the US dollar. Lower interest rates could weigh more on the PEN, similar to what we have seen for the CLP, but with a lower Beta to the USD. An upside break of USDPEN3.74 (200DMA) could be an inflection point. The carry is diminishing, while declines in FX forward implied yields accelerate and, as such, we prefer USDPEN longs.
- In local rates: Relative valuations at the long-end of the Soberanos curve vs. the US are below historical norms. The 10Y term premium in Peru has less scope to fall at the pace seen in the last 12 months (see Figure 2). With foreigner bond holdings at close to 13-year lows scope exists for these investors, particularly cross-over investors, to add Soberano holdings. Current foreign holdings are skewed towards longer-dated tenors. This, paired with the onset of the cutting cycle, leads us to prefer tenors at or within the 2031s.
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