Brazilian Real is 19% more devalued than it should be

The real effective exchange rate has risen 9 percentage points since the beginning of the year; growing political risk and fiscal uncertainties have pushed the dollar higher

Brazilian Real is 19% more devalued than it should be
Photo: REUTERS/Ricardo Moraes
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The Brazilian real has devalued 19% and may continue with a wide negative deviation until the end of the year as fiscal fears resurface. The analysis is from Emerson Marçal, coordinator of the Center of Applied Macroeconomics of the FGV São Paulo School of Economics.

The data from the latest study refer to the end of June. The calculation is made for the real effective exchange rate. At the end of last year, this misalignment was around 10%.

The exchange rate has been weaker than expected since February 2020, before the pandemic rocked global financial markets. This is one of the longest negative streaks since the 1980s.

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Marçal explained that despite the improved trade balance and terms of trade, and a wider interest rate differential, renewed fiscal concerns and uncertainties over monetary policy in the United States have put upward pressure on the dollar, keeping the negative deviation high.

In recent months, political risk has increased again as the Brazilian government has come under more pressure from Congress’ investigations about the federal government’s handling of the pandemic. With this, President Jair Bolsonaro has needed to yield to political pressure from the so-called “centrão,” traditionally a demander of more spending, weakening the position of Economy Minister Paulo Guedes.

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“More and more the election next year will be on the radar. This up and down, the fluctuations, should continue,” said Marçal. The negative deviation of the exchange rate should persist until the end of the year.

“The pressure is on for more spending next year. The government will not be able to carry out any important reforms this year. And we have to keep an eye on the issue of monetary policy.”

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