In these days no one reads other subject in the Brazilian economic newspapers that not related to the “unsolvable problem” of the appreciation of the real against the dollar.
These days we are experiencing a conjunction of important economic factors affecting
There are two very important world economic factors affecting the exchange rate markets all over the world, but with greater impact on the emerging market economies nowadays. One is related to the real economy, the other to the financial one. In the last ten years the world and specially the commodity exporting countries,
But this scenario of high economic growth around the world has developed in conjunction with increasing current account deficits in the American economy. It is important to note that, since the last quarter of 2005, the economy of the United States has had deficits in the trade as well as in the income balance; moreover, the current account deficits of the last fifteen years has transformed the American economy into a net foreign debtor, the largest one. Many prominent economists around the world argue that these imbalances cannot continue forever, some of them emphasizes that such imbalances must be reduced very, very soon. The fact is that the investors around the world are starting to diversify their portfolios and reducing - however slowly - their investments denominated in dollars. This modest change in portfolio choices of these world financial investors have been able to flood some emerging market economies - those who have been able to implement consistent macroeconomic policies in recent years - with large amount of capital inflows that are entering into different markets: debt, equity, real estate, commodities, etc. The fact that there is excess liquidity in developed economies does not fully explain the immense inflow of capitals to Brazil. Still, it is possible to argue that the part of this global liquidity went to
In turn, one could say that the significant increase in Brazilian exports as well as the greater capital inflow are the two major factors explaining the strength in the Real (against the USD), especially since 2005. But there is also a third related factor that is generating more pressure towards an appreciation of the brazilian real: inflows – or carry trades - based on the interest differentials, even if those carry trades mean a bet against the uncovered interest rate parity condition. In this sense one could argue that the
The exchange rate is a forward looking economic variable in the sense that its value is based on current and future conditions. In this case many forecasters see the exchange rate more appreciated than the current level; if that were to happen, the central bank’s effort to prevent the appreciation could fail after a significant fiscal cost . On the other side, if the current account surplus were to be smaller in the near future or other global shocks were to lead to a reduction of the speculative capital inflows it is possible that the exchange rate could remain close to its level. The first scenario seems more likely but we have to wait and see…