Another aspect to follow will be the regional scenario and mainly the situation at a global level, with a United States Federal Reserve (Fed) that could begin to cut the interest rate, generating a global impact on the currency.
The reasons for an “ironed” dollar
The senior researcher at the Center for Economic Research (Cinve), Adrian Fernandez, highlighted in dialogue with Ambit that, due to the free floating system, “the main force that influences the supply and demand of foreign currency lies in the incentive to maintain assets in pesos due to the difference in interest rates,” pointing to the monetary policy of the BCU and that of the Fed.
In this regard, he assessed that “the contractionary policy carried out by the BCU is having a decisive influence” and added that “probably a lesser effect has to do with current account flows.”
While, Deborah Eilender, researcher at the Center for Development Studies (CED), told this medium that “the dollar “It remains very stable at a low level for good reasons,” highlighting that “there was a genuine and massive inflow of foreign currency.”
Eilender highlighted that “the Foreign direct investment (FDI) reached the highest value in the last decade” and highlighted the income of dollars from the signing of the agreement with HIF Global for the construction of a plant green hydrogen in Paysandu.
To this he added that “there was exports for 11 billion dollars”, while highlighting service placements and the tourism receptive. Regarding monetary policy, he highlighted the 250 basis point drop in the MPR in 2023 and maintained that the decisions of the Copom “may have an effect on the nominal exchange rate, but not the real exchange rate long-term, which depends purely on the fundamentals of the economy and at the same time is not synonymous with competitiveness”.
Is a correction of the exchange rate delay possible in 2024?
For his part, CPA economist Ferrere, Giuliano Cantisani, echoed the latest estimates from the BCU and, in relation to the exchange delay, assured Ambit that “the real exchange rate is approximately 16% below the level suggested by its fundamentals.” However, he anticipated: “We do not expect a significant correction this year. The base scenario is a slight depreciation for 2024.”
Along the same lines, Fernández predicted: “In Five We are skeptical, mainly because of monetary policy. The BCU decided to maintain the MPR at 9% and would indicate that the downward trajectory has stopped.”
The economist questioned that “there is no clarity in monetary policy” and ventured: “Our projections show an increase in inflation year-on-year in the coming months, so it would be difficult for the BCU to justify new reductions in the interest rate”.
“In this context, the incentive from monetary policy is maintained for downward, or at least stable, values of the exchange rate in Uruguay. Which will also depend on the movements in dollar rates,” he argued.
The Fed’s decisions take on special relevance
When asked about possible movements in the interest rate by the Fed, Fernández stated that “they can be important” for the value of the dollar in the local market and noted: “What matters is the rate differential between assets of similar risk (except the exchange rate). But the Fed does not seem likely to raise rates.”
“In fact, it is more likely that in the coming months they will begin to decline. Given the recent ‘rebound’ in inflation in USA., The Fed would not begin its rate cut until May and that only if greater convergence to its rate objectives is observed. inflation”, he predicted.
In turn, Eilender considered that the Fed’s rate cycle “is expected to be less restrictive, with between 4 and 6 reductions by 2024.” “Thus, it would be expected that the dollar remains at similar levels, although it may present certain volatilities,” he stated.
Although he does not see it as a probable scenario, Cantisani warned that “an eventual monetary policy more expansive by the Fed, could imply appreciation pressures, as well as an eventual consolidation of the fall in the inflation or the external surplus balance.”
At the same time, he recognized that “there are some factors that could lead to greater depreciation, such as an escalation of geopolitical conflicts internationally, a deepening of the fall in commodity prices commodities of exports and a faster and more intense reduction of rates by the BCU than expected.”
The impact of the electoral year and the regional and international scenario
An additional factor for this 2024 is that it is a election year, both in Uruguay like in USA. For Eilender, this situation “can have certain effects depending on the result.”
In turn, Fernández admitted that he thought that “the pressure from different economic agents (exporters, mainly) and politicians could influence the BCU to maintain a declining trajectory in the interest rates”, but he contrasted that expectation with the result of the last Copom, which “opens a period of waiting for judgments on the ‘incidence’ of political pressures.
Meanwhile, the Cinve economist specified that “it is possible to perceive a tendency towards the revaluation of the dollar against other currencies” and admitted that “a strong dollar could influence a greater devaluation of the Uruguayan Peso”, but he warned: “I wouldn’t bet significantly on it. The experience of 2022 and part of 2023 is that the Uruguayan peso was revalued against the dollar, despite the fact that the US currency was strengthening internationally.”
To this, the CED researcher added the situation in Argentina. “It is getting more expensive very quickly and the price gap “It is shrinking, which is why consumer tourism, which was more than 1 billion dollars in 2023, should not be repeated or it would be to a much lesser extent, with foreign currency that would not be leaving our country,” he highlighted.
Source: Ambito
