Opinion – Samuel Pessôa: Dollar could be at R$ 4.80

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Since President Lula won the elections, there has been a decision to increase public spending by approximately R$200 billion in relation to what was in the Budget Bill for 2023, which Paulo Guedes sent in August 2022 to the National Congress.

In addition to raising public spending, Lula has confronted the financial market with heavy criticism of the interest rates charged by the Central Bank, in addition to criticizing the institution’s independence.

Lula’s confrontational attitude surprised the market. However, since October 2022 there has been a process of appreciation of the real against the dollar. For example, from October 19, 2022 to February 2, last Thursday, the real appreciated by R$0.23, with the exchange rate going from R$5.27 to R$5.04. Thus, apparently there has been no cost to Lula from his attacks on the financial market or the Central Bank.

The great difficulty is that international factors also affect the exchange rate. And there are signs that the US dollar has been losing value against all currencies.

Thus, it is necessary to know how much of the appreciation of the real in the period was due to internal dynamics and how much to external dynamics.

A methodology to answer the question in the previous paragraph is to consider control groups formed by a set of countries. I consider three control groups: developed countries, emerging countries and commodity producing countries. Australia, for example, is in the first and third groups; Chile is in the second and third groups. Countries with very unstable economic policy, such as Argentina and Turkey, are not considered.

For each control group we constructed a single “exchange rate” common to all currencies of the countries in the group. It has the characteristic of being the combination of exchange rates that best describes the common variability of the group’s currencies.

We are therefore left with three “exchange rates”, one for each group. Then we correlate each of them with our currency. The result is an exchange rate for Brazil called “synthetic”. We therefore have a summary of the real for developed countries, emerging countries and commodity producing countries. Three synthetics, therefore.

The synthetic represents the behavior of the real if it followed the average of the countries that make up each of the groups.

In the window between October 10, 2022 and February 2, last Thursday, we saw that the real appreciated by R$ 0.23 per dollar. The valuation of the synthetic for developed countries was BRL 0.49, for emerging countries, BRL 0.69, and for commodity producing countries, BRL 0.47.

The synthetic of emerging countries is very sensitive to the exchange rate of the emerging countries of Eastern Europe, which recently presented, as a result of the improvement in the problem of gas shortages, a more accentuated drop in risk. Thus, if we consider the other two synthetics, the real appreciated by around R$0.25 per dollar less than the synthetics.

That is, everything indicates that Lula’s talk and the fiscal worsening with the constitutional amendment of the Transition have a cost of R$ 0.25 per dollar in the quotation of the Brazilian currency. The real could be quoted today at R$4.80 per dollar. It would be a great help for BC to start a cycle of interest rate reduction.

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