SAO PAULO (Reuters) – Domestic fiscal risks are likely the main driver of the Brazilian currency’s devaluation, and with the prospect that the global environment for emerging markets becomes less benign, the real should end this year at 5.47 to the dollar, projected Citi in a report on Wednesday.
Just under two weeks ago, the bank estimated an exchange rate of 5.33 to the dollar at the end of 2021.
According to Citi, the Brazilian currency has already been traded at undervalued levels since the beginning of the Covid-19 pandemic, since, “with the exception of the risk premium, all other variables are at levels that should have helped an appreciation of the real”.
Among these factors, the report pointed out the rise in commodity prices, the lower levels of the dollar index reached during the pandemic and the recent increase in the interest rate differential between Brazil and advanced economies.
This, in turn, suggests that “domestic risks mainly related to fiscal uncertainties may be the great force keeping the real devalued”, wrote in the document Leonardo Porto (Chief Economist of Citi in Brazil), Thais Ortega and Paulo Lopes (Economists) .
According to Citi, this hypothesis is reinforced by the disparity in performance between the Brazilian currency and that of other pairs of commodity-exporting countries, which had a much more moderate devaluation since the beginning of the pandemic.
In this context, were it not for the benign international scenario for emerging country currencies, “we would probably have seen a much more devalued real in the last 18 months,” said Citi economists.
And as the favorable environment lags behind – amid rising expectations of monetary tightening in the US, doubts about global economic growth and the possibility of an impact on commodities – the real could be more vulnerable to negative swings in the scenario for currencies emerging countries, warned Citi.
On Wednesday, the dollar was trading at around 5.49 reais on sale, accumulating a nominal high of 5.8% in 2021. Compared to the levels of the end of February 2020, before the pandemic forced economic restrictions on combat to Covid-19, the dollar is up 22.5%.
In the same period, a JPMorgan index for currencies of emerging countries accumulates a devaluation of just over 5%.
By the end of 2022, Citi projects an exchange rate of 5.49 to the dollar.
(By Luana Maria Benedito)
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