How can the Fed’s decision on its rates impact Uruguay?

How can the Fed’s decision on its rates impact Uruguay?
How can the Fed’s decision on its rates impact Uruguay?

The United States Federal Reserve (Fed) once again kept unchanged the interest rates and anticipated that there will be a single cut in the remainder of the year, ratifying his monetary politics and expecting rates to stay high for longer.

This situation, which occurred despite “modest additional progress” in the US central bank’s goal towards a inflation of 2%, will generate a global impact and will have its correlation in Uruguay, with the possibility of affecting the value of the dollar, the behavior of the bonuses and up to the level of investments.

The Fed’s decision had a contradictory initial impact

Regarding the initial impact, the supervisory economist at CPA Ferrere, Giuliano Cantisani, he expressed to Ambit that the Fed “had a speech rather contractive, having gone from predicting three rate cuts this year to one” and warned that the increase in the long-term rate “ratifies the discourse of ‘higher rates for longer’.”

However, he analyzed that the market “had a rather positive reaction, with increases in bags (something contradictory to the expectation of a higher rate) and falls in US bond rates.”

“Investors seem to have paid more attention to certain signs of moderation in the speech, such as the fact that the Fed has highlighted that the inflation “It is showing modest progress towards its objective,” Cantisani noted.

The economist observed that the dollar weakened against euro, the pound and the and in, but it remained strong against the currencies of emerging economies. In any case, he clarified that “it is possible that this initial market reaction will be reversed in the coming days, to the extent that this more contractionary speech from the Fed is consolidated.”

The value of the dollar

The high level of rates and the possibility of them staying high for longer could boost the dollar rising in the Uruguayan exchange market, where the criticism for the exchange delay They are starting to become more and more frequent.

However, Alan Babic, financial advisor Balanz Uruguay, manifested to Ambit that “a great deal is not expected volatility” in the exchange rate and recalled that “there has been speculation about lowering rates for a long time, but it has not had a great impact at the local level, because it is taken as a discount.”

For Babic, the exchange rate at the local level “is not so linked to the rates in USA”, but linked it at a higher level to “competitiveness in Brazil”. In any case, he did not rule out fluctuations due to elections, both in Uruguay as in the North American country.

At the same time, he highlighted that the Central Bank of Uruguay (BCU) “applied a Monetary Policy Rate to make the market grow Uruguayan Peso, with Monetary Regulation Bills (LRM) that have an appeal that makes people turn to pesos”, within the framework of the plan that seeks to contain inflation.

Dollar, flag of the United States.jpg

Photo: Vecteezy

The impact on bonds

With respect to United States Treasury bonds (treasuries), operated downwards this Wednesday despite the Fed’s announcement, with a fall in the 10-year Treasury reference note of 12.5 basis points, to 4.277%, after touching 4.25 %, its lowest level since April 1. The yield on the 30-year bond also fell (9.6 basis points, to 4.439%) and the yield curve (43.9 basis points).

When analyzing the situation, Babic considered that “sooner or later the price will rise because the rate is going to fall” and valued that the iShares 20+ Year Treasury Bond ETF (code TLT) rose in recent days, going from 90.89 to 92.52 dollars and highlighted that “a US bond gives you 5% per year and, if the rate goes down, what can happen is that the longest bond goes up and the rate goes down. cost effectiveness”.

Regarding the Fed’s monetary policy meeting, he clarified that “there are no certainties, they will see how the parameters work out” in the coming weeks, so what may happen in the future “is pure speculation,” although for the moment, Under the influence of the US central bank, interest rates in dollars reached a 21-year high of 3.5%, according to the BCU.

Impact on investments

The prospect of interest rates remaining high for longer could also weigh on investments in the country, since the market takes refuge in the dollar, given the attractiveness of returns.

“Nowadays there is not so much prize to go to emerging markets having a US bond at 5%, which is an attractive return,” admitted Babic, who countered that “in the event that rates go down, investors can turn to emerging markets, which could be financed more easily.”

If this scenario is ratified, it would be a strong blow for the country, which had a record of 1,000 projects and investments in 2023, for a total of 1.2 billion dollars in the last two years, according to a report prepared by Uruguay XXI.

Source: Ambito

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