Opinion – Samuel Pessôa: Four factors seem to explain the fall in the dollar

Some appreciation in the currency was expected for the beginning of this year due to the vote on the 2022 budget law, in December last year.

After the constitutional amendment of the precatories, which opened BRL 100 billion in the 2022 Budget, the vote on the budget law established a size for the fiscal hole.

Decompression occurred, but much more intensely than anyone imagined. Other factors contributed.

Two main factors explain the strengthening of the real, which on Friday (25) closed at R$4.74 per dollar.

The first was the resumption of a compensation mechanism between the real and the price of commodities. Since the exchange rate fluctuation in early 1999, whenever commodities in the international market become more expensive, the real appreciates, and vice versa.

This balancing mechanism exists, as we are a major exporter of raw materials. Whenever commodities become more expensive in the international market, we get richer, and, consequently, our currency appreciates, and vice versa.

Between May 2020 and November 2021, this balance ceased to exist. When the epidemic hit, the price of commodities plummeted — there was a week when the price of oil went negative, as it was charged to store — and our currency devalued from BRL 4.3 to up to BRL 5.8, in May 2020.

When the very strong recovery of the world economy took place, commodity prices rose a lot. They doubled from the low point observed in April 2020. I think that the increase in risk perception, due to the impact of the epidemic on spending beyond the government ceiling, neutralized the seesaw effect between the real and the price of commodities. Instead of going back to R$4 per dollar, our currency was hovering around R$5.5. This neutralization explains an important part of the inflationary shock here: if the exchange rate had behaved normally, part of the inflationary effect of rising commodity prices would have been offset by the appreciation of the real.

Since December 2021, the seesaw effect has started to work again, and part of the currency appreciation results from the rise in commodity prices. The currencies of other commodity-exporting economies have appreciated as well.

But there seems to be a third factor contributing to the appreciation of our currency. The war in Europe in one region, Eastern Europe, with several emerging countries has improved the relative risk perception of Latin America. In this “ugliness contest”, we get a little better.

Finally, there are signs that rising interest rates are contributing to currency movement.

The joint action of these four factors — removing the goat of the 2022 budget law from the room, the return to the seesaw price of raw materials and exchange rates, the relative improvement in Latin America due to the war and the greater interest differential — seems to explain the currency movement, which went from BRL 5.74 on December 21 to BRL 4.74 last Friday. Incredible appreciation of R$1 per dollar.

It is very difficult to build a scenario for the exchange rate. My assessment is that the current appreciation will at some point cease and, throughout the electoral process, we will experience a lot of volatility, with the real devaluing a little.

At the end of the year, with the resumption of a structural fiscal adjustment path by the new government, we should return to a slow path of strengthening our currency.