March 21, 2011 / 8:59 PM / 9 years ago

UPDATE 4-Peru's markets volatile on election, Moody's

* CDS costs rise as nationalist candidate Humala gains

* Moody’s says may upgrade Peru’s ratings after election

* Sol weakens 0.54 pct, Lima stock index rises 4.29 pct (Adds quote from Humala, closing stock index price)

LIMA, March 21 (Reuters) - Peru’s currency weakened and the costs of insuring the country’s bonds rose on Monday as left-wing nationalist presidential candidate Ollanta Humala surged in polls for the April 10 vote.

The sol trimmed losses slightly after Moody’s revised its outlook on Peru’s debt to positive from stable but still closed at its weakest level in a month on the local spot market. Moody’s said an upgrade was possible in six to 12 months after a new government is in place. For more see [ID:nN21301283].

In what marked the first time during the campaign that political noise has affected asset prices, the sol PEN=PE closed 0.54 percent weaker at 2.784 per U.S. dollar and Peru’s five-year credit default swaps PEGV5YUSAC= rose 6 basis points to 124.

Three traders said the market was rattled by two polls released over the weekend that prompted foreign investors to trim positions.

“The market is quite complicated today because of the polls, which have pushed foreign clients to buy dollars on the spot market and stop renewing futures contracts,” said one trader who declined to be named because of Lima’s small market.

Despite the selling of the sol, Peru’s main stock index .IGRA closed up 4.29 percent as shares in the local unit of global miner Gold Fields LACi.LM LAC.LM rose more than 30 percent after its parent launched an offer to buy back its shares.

HUMALA’S RISE

Citing greater political risks in one of the world’s fastest growing economies, Barclays on Sunday recommended that clients avoid the sol and reiterated a recommendation to buy Peru’s credit default swaps.

Barclays, Goldman Sachs and Nomura all said in reports that the election is now a five-way race because Humala and former Wall Street executive and Prime Minister Pedro Pablo Kuczynski have risen in polls.

Their rise has pressured front-runner and former President Alejandro Toledo, along with lawmaker Keiko Fujimori and former Lima Mayor Luis Castaneda.

All of the main candidates in the race support market-friendly economic policies in place for nearly two decades in Peru, though Humala at times has favored expanding the role of the state in the economy and criticized free-trade deals.

“We need to calm the exchange market — we are available to speak with whoever we need to in order to explain that there is no reason to feel uneasy,” Humala, who has worked to moderate his campaign tone, told journalists on Monday. [ID:nN21299099]

Polls show Humala, who nearly won the 2006 race, would lose a runoff vote on June 5 against all potential rivals. The two latest polls showed him in either second or third place.

“We continue to believe that the chances that Mr. Humala can win in the run-off are very limited,” said a research note from Goldman Sachs. (Reporting by Ursula Scollo, Caroline Stauffer and Teresa Cespedes; Editing by James Dalgleish)

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