(Updates currency, bond market reaction)
LONDON/LIMA, April 12 (Reuters) – Peru’s currency fell more than 2% in opening trading on Monday and the country’s 2030 sovereign bond hit a more than seven-month low after socialist candidate Pedro Castillo unexpectedly took the lead in the first round of the country’s presidential election.
Official results were still to be announced, but exit polls pointed to far-left candidate Castillo facing off against pro-business Keiko Fujimori in a second-round run-off vote in June.
While often politically turbulent, Peru has been one of the more steadfast and reliable markets in Latin America in recent years, attracting international money managers into its bonds and sol currency.
The sol dropped 2.1% at the open on Monday to 3.68/3.70 soles per dollar, before paring losses to 0.88%, according to traders and the central bank. Peru’s 2030 euro-denominated sovereign bond fell 1.2 cents to its lowest since late August 2020, according to Refinitiv data. Spreads – the risk premium over U.S. Treasuries – earlier widened out around 10 basis points according to traders.
“We did not anticipate a scenario in which an extreme-left candidate, who just a week ago was printing below 5% of voting intention, managed to win the first round,” analysts at JPMorgan said in a note.
Castillo had tapped into public anger which has been fired up in Peru over the last year.
The economy crashed to its hardest fall in three decades last year as the COVID-19 pandemic hammered the copper-rich country. Tough lockdowns failed to stem the spread, with Peru one of the hardest hit in the world per capita.
Meanwhile, politicians have come under fire. President Martin Vizcarra, who had been popular, was impeached by Congress last year over allegations of corruption. His successor resigned shortly after following deadly street protests.
“I would say it is negative for bonds overall as political volatility is here to stay in Peru,” said Natalie Marshik managing director emerging markets at Stifel, adding that Peru’s Congress would be fragmented after the election.
“The short-end (of the bond market) and belly has already sold off and I would expect more weakness,” although a plus point was that Peru does have a strong balance sheet.
The market volatility is also likely to be a exacerbated after last week saw the sol score its best weekly jump in over a decade as rising copper prices helped it bounce back from record lows the previous week.
“Castillo’s three (policy) pillars are pretty scary,” said Jupiter Asset Management’s Alejandro Arevalo. “He’s talking about nationalisation, about the government taking control of the economy.”
“He’s in favour of governments or revolutions like in Cuba, Ecuador, Venezuela, so it’s something that could bring significant volatility to the market.” (Reporting by Marc Jones, Tom Arnold in London and Maria Cervantes in Lima; Editing by Susan Fenton)
