The Exchange Rate and Domestic Fundamentals
The real has been appreciating since the middle of April, reaching nearly R$2.30/US$. But it was not the announcement of the primary surplus target that led to this temporary strengthening cycle, because in the same period a similar movement has occurred with the currencies of the great majority of emerging countries, accompanied by a decline in the respective CDS quotations (Graph 1). What’s behind this behavior was the belief – wrong in our opinion – that the American economy is decelerating again. Before the release of the non-farm payroll result last week put paid to the diagnosis of a persistent slowdown in growth of the American economy, the market had witnessed a sequence of weaker indicators, such as low hiring figures for two straight months along with poor results of the ISM and industrial production. Those numbers, however, reflected temporary movements, largely due to the extremely severe winter in the United States. With the perception now that American growth will hold steady and reaffirmation of continued tapering, the forces from the international economy for appreciation of the real have now eased.
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