The Real: Excessive fluctuation? Excessive depreciation?

BRAZIL ECONOMICS - Report 29 Apr 2019 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

Last week there was a particular strengthening of the dollar against other currencies. The dollar appreciation combined with the domestic risk due to the fiscal and political uncertainties hastened the depreciation of the Brazilian real, which exceeded the level of R$4.00/US$, prompting clamor for the Central Bank to intervene in the forex market. Interventions are welcome when there is excess volatility and/or when the market becomes dysfunctional, but not in response to just any exchange rate movement, less so when the real exchange rate is near its fair value, as is the case now.

Prof. Kenneth Rogoff once said, “exchange rates are naturally born schizophrenics.” The nominal exchange rate (in R$/US$, for example) behaves like a financial asset price, reacting quickly to the differential of interest rates and sovereign risks between the USA and Brazil, however it also has the dimension of a relative price between tradable and non-tradable goods. Since the prices of tradable goods respond almost immediately to the nominal exchange rate while those of non-tradables (among which wages are predominant) are much more rigid, in the short run variations in the nominal exchange rate are transmitted to the real exchange rate, generating a high positive correlation between these two variables. This leads to the illusion that it is only necessary to look at the changes on the nominal exchange rate.

Now read on...

Register to sample a report

Register
Sign-in
Forgot your password?
Copyright 2024 GlobalSource Partners. All rights reserved. This report is prepared for GlobalSource Partners’ clients and may not be redistributed, reproduced, stored in a retrieval system, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of GlobalSource Partners. This report is distributed simultaneously to our website and other portals used by GlobalSource Partners. The information herein was obtained from various sources and is believed to be reliable but GlobalSource Partners does not warrant its completeness or accuracy. Neither GlobalSource Partners nor any Country Analyst, officer or employee accepts any liability whatsoever for any direct, indirect or consequential damages or losses rising from any use of this report or its contents.