Economic tension is global, but the Brazilian currency is plummeting further
Since the beginning of 2020 until this Monday, the dollar has risen 42% against the real (BRL). The Mexican peso (MXN) and the Colombian peso (COL) lost 25.4% and 19.80% of their value against the dollar in the same period.
The economic tension generated by the new coronavirus only speeded up a movement that started in 2018, of investors searching for more secure assets amid a likely global economic slowdown fueled by the United States-China commercial dispute.
In general, it is the fiscal fragility, aggravated by the new crisis, and the political tensions that are leading to a further deterioration in expectations about Latin American economies and, consequently, to a greater fall in their currencies against the US dollar.
Another reason for the negative performance of emerging currencies, according to a Bank of America (Bofa) report, is that the coronavirus pandemic led investors to rescue their applications earlier in the emerging markets this year, which also has an effect on exchange rates.
Instead of waiting for May, as they have done for the past 12 years, investors began repatriating their money in March and April, which put pressure on the exchange rate and caused the real and other emerging market currencies to lose even more value in that period.
The biggest concern of global investors is not exactly the level of the exchange rate (high or low), but its stability. With the exchange rate stable (even high), investors could still profit by arbitrating interest rates, that is, taking money at low-interest rates, in developed countries, converting it to the currency of emerging countries, and investing in those with the highest rates interest.
The problem is that, as a way to combat the crisis, emerging countries are implementing an aggressive monetary policy that brings interest rates down. With each new cut, another wave of investors will rescue their investments in these countries and repatriate their money to their homeland, pressuring the exchange rate and threatening the profitability of those who are still investing in emerging countries.
This cycle is one of the reasons why analysts do not see the position of emerging currencies against the dollar changing anytime soon.
In addition, during the coronavirus crisis, many companies in emerging countries are failing to export and, therefore, are not bringing dollars into their economies, which only worsens the scenario and also makes the dollar rise. |
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