Where is the Real Headed?

BRAZIL ECONOMICS - Report 26 Jan 2015 by Affonso Pastore, Cristina Pinotti and Marcelo Gazzano

In the past several days the real has appreciated, interrupting a lengthy period of gradual weakening. At the start of the year, the exchange rate was fluctuating in the neighborhood of R$ 2.70/US$, but recently it has gotten stronger, closing last week at R$2.58/US$. The real is one of the currencies that have strengthened the most against the dollar since the start of 2015, only behind the Swiss Franc, which has appreciated 11.5% (Graph 1). We believe the two most important causes of this movement are: (i) the stimulus to capital inflows caused by the better confidence in the conduction of economic policy under the new finance minister, Joaquim Levy; and (ii) the signals that because of the “corrective inflation” caused by the necessary adjustment of administered prices, the interest rate will remain high for longer than previously envisioned. However, due to the presence of various other forces acting in the opposite direction, we don’t see space for an appreciation.

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