Exchange Rate: Brazil and Its Peers
The behavior of the Real, which in recent weeks has weakened beyond the level of R$ 5.00/US$, has followed the global appreciation of the dollar in response to the increase in long-term interest rates in the United States. This behavior is different than that of the currencies of Mexico and Colombia (Brazil’s Latin American peers), which have been appreciating since the start of the year.
The gloomy evaluation of the government’s economic policy, both by domestic and foreign investors, has weakened the position of the Real in relation to the currencies of other emerging countries in general. Besides this, specifically in the case of Colombia and Mexico, monetary easing cycle is at a less advanced stage than in Brazil, and fiscal policy is more solid. In Mexico, the foreign currency flow has also been affected by the nearshoring process, which has boosted direct investments in the country, transforming it into the leading exporter to the United States, surpassing China.
If the Brazilian economic policy remains on the same path, characterized by a combination of fiscal deterioration (with a risk of even greater spending to boost Lula’s approval ratings); uncertainty regarding the Central Bank’s commitment to the inflation target with the appointment of a new president and two new directors until December; and by the government’s growing interference in some of the country’s main companies, we see no domestic forces for that could lead to currency strengthening. Contrary, besides shadowing the general movements of the dollar, which has been strengthening with the rise of US long-term interest rates, the Real may weaken further relative to other emerging markets currencies.
Now read on...
Register to sample a report