Four effects expected in Uruguay from the Fed’s rate cut

The United States Federal Reserve (Fed) announced yesterday the long-awaited first cut in interest rates, and took the references from their maximum historical range at 5.25% – 5.50% to 4.75% – 5% after the sharp drop of 50 basis points, What effects are expected? Uruguay after this beginning of the cycle of flexibility in US monetary policy?

Dollar

One of the effects of the lowering of rates of the Fed most observed in Uruguay, In a context of constant claims for exchange delay —despite the fact that the exchange rate is at almost two-year highs— is the impact that the change in monetary policy in the United States could have on the global dollar and, therefore, in the local price.

In that sense, a greater weakness of the greenback would imply, in turn, a cut in the appreciation that the currency has been exhibiting in the Uruguayan markets, which already accumulates an annual improvement of 5.86%.

However, it is worth clarifying here that the global dollar fluctuation It is not the only factor that affects the local exchange rate, and this can be seen in the fact that, despite the international context where the dollar index – which measures the performance of the bill against a basket of six other currencies – hovers around to its lowest level in more than a year, the value in Uruguay It remained relatively stable in the range of 40 pesos and is now fluctuating in the range of 41 pesos.

This, as explained to Scope the economist Jose Licandro —former Monetary Policy Manager of the Central Bank of Uruguay (BCU) and master’s degree in Applied Economics with a mention in Macroeconomics—is due in large part to a reduction in the income of dollars due to the fall of the foreign direct investment (FDI). That is, there is less supply of the US currency, which increases its price in the local market —unlike what happened in 2022 and 2023.

In any case, it will be necessary to observe how the possible return of large investors to Uruguay affects this current scenario; as well as an eventual rebound in the price of commodities.

Bond flow to emerging markets

One of the impacts of cutting the Fed is that the rates of the curve US bonds will tend to fall, just as the curve would Uruguay in dollars, so that the prices of global bonds in that currency will rise.

A fall in risk-free rates and a weak dollar globally will stimulate demand for securities from emerging countries in local currency, making those from emerging countries fundamentally attractive. Latin America, influenced the titles in Uruguayan pesos.

In that sense, economists International Monetary Fund (IMF) They believe that the rate cuts of the Fed could reactivate the issuance of Eurobonds—external bonds—and, with it, the flows of bonds to the economies of emerging and developing countries, including the Uruguay.

Reactivation of investments

Hand in hand with this greater flow of bonds and capital, the FDI; and in this area, Uruguay It is presented as an interesting option to have the country risk lowest in the region. With the lower cost of borrowing for large investors, who will also seek greater profitability, it is possible that there will be greater movement in this regard after a lean 2024 in this regard.

In this sense, large investment funds are also looking for new destinations for their clients and, according to the firm Grantham Mayo Van Otterloo & Co. LLC (GMO), Uruguay It is weighted as one of the emerging markets to take into account. This fund, which manages $6.1 billion in emerging market debt, being one of the largest in the United States, highlighted Uruguayan assets in local currency along with those of other countries considered “frontier” emerging, such as Costa Rica, Jamaica and Dominican Republic.

Although the Uruguayan asset market is marginal compared to large regional economies such as those of Brazil either Mexico, The current moment finds investors more reluctant to bet on assets in Mexican pesos or reals because they have shown lower returns than other Latin American currencies.

It will be necessary to consider that, as has happened in the past, an increase in investments will impact the Uruguayan peso, strengthening it.

Greater scope for local monetary policy

The lowering of rates by the Fed It also puts the BCU in a decision-making situation, as the gap between the types of Uruguay with the United States is once again significantly broad. But, at the same time, it allows the local monetary authority to be able to make its own cut without necessarily entering an expansive terrain of monetary policy—currently, it is in a neutral-expansive area because, according to Licandro, it presents a bias.

This margin would even allow us to lower the Monetary Policy Rate (MPR) without this having effects on inflation. While, in turn, the weakness of the dollar at a global level and, consequently, its impact on the local exchange rate, could help keep the increase in prices even lower.