Opinion – Grain in Grain: With the end of the election, understand if you should buy dollars to protect yourself

With the uncertainty over who will be the new president, now comes the doubt about what the new president will do. This week, I received several inquiries as to whether it would be convenient to buy dollars at this time to protect yourself. I explain below how you should reflect to answer this question.

The first point to consider is the real justification for the investment.

Many justify the doubt of buying in dollars for the purpose of protection, but in fact they would really like to bet that the Real would depreciate.

To understand if your justification is protection or betting, ask yourself the following questions: from what risk would buying a dollar protect you? Do you want to buy dollars, because you want to bet that the Real will depreciate?

Remember, foreign exchange is a risky instrument that has large price fluctuations in the short term. If you want to protect yourself from price fluctuations, an alternative is to migrate to assets referenced to the CDI that have low price fluctuations.

However, there are justifications for protection purposes. For example: Do you have dollar liabilities? Do you have any plans to live abroad and the currency that will represent your costs is the dollar? Do you have risky assets with a negative correlation with the dollar?

These would be justifications for the purchase of foreign currency as a form of protection. However, the election should not interfere with the decision.

For example, if you have dollar commitments, you should be in the habit of buying a little periodically as protection. After all, the fact that you don’t buy means that you are making a bet that the Real would appreciate.

The same reasoning applies to the case of having a plan to move abroad.

Also considering protection, a reason to buy dollars is if you have exposure to the Brazilian stock exchange. The dollar’s correlation with the Ibovespa in the last twenty years is -0.64. This means that usually when the stock market goes down, the dollar goes up. As both tend to have positive variation in the long term, having both in the portfolio is a good strategy for the long term, as it would reduce volatility and increase returns.

But what would not be a justification that is usually used?

Some argue that with a possible devaluation of the Real, their purchasing power could be compromised.

If your answer is that you want to protect yourself from an increase in inflation because of the pass-through to inflation in the event of a rise in the exchange rate, then buying dollars is not the best answer in the long run.

In the last fifteen years, the dollar has appreciated 5.6% per year. The variation of the IPCA in the same period was 5.9% per year. In these fifteen years, we have gone through several internal and external crises. Even so, buying dollars was a worse investment than, for example, investing in CDBs referenced to the IPCA throughout this period.

Now, if your objective is not protection, but betting on currency devaluation, remember to consider that the market usually anticipates part of the possible negative scenarios. In the last week, the dollar has already appreciated more than 2.5%.

So, if you are a long-term investor, intend to stay in the country and do not have dollar liabilities, there are other ways to protect yourself in the long term than buying dollars. Bonds referenced to the IPCA would be a better long-term alternative,

Michael Viriato is an investment advisor and founding partner of Investor’s House

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