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How the dollar fared after the BCU rate hike and why it did not intervene in the market

The dollar cut its mini-streak of five rises in a row this Friday that he had shown in Uruguay since the beginning of April, and quickly left the $42 threshold at the wholesaler which it had reached on Thursday after appreciating 0.8% against the Uruguayan peso. The interbank note was traded at an average of $41.64 this Friday, down 1% compared to the previous day. While, the last operation of this Friday was agreed at $ 41.55 through the screens of Bevsa.

This Thursday afternoon, the Central Bank of Uruguay (BCU) resolved an increase of 125 basic points (1.25%) of the interest rate, to 8.5%, above the 75 points that had been announced in the previous communications of the Monetary Policy Committee (Copom) to anchor inflationary expectations in an adverse situation to contain the rate of rises in domestic prices.

Meanwhile, on the BROU public board, the green ticket was offered at $40.35 for purchase and $42.75 for sale this Friday. ANDn the first week of April, the dollar posted a rise of 1.2% (about $0.51).

Why didn’t the BCU intervene?

The sharp depreciation of the dollar in Uruguay in recent weeks has revived the concern of Uruguayan exporters. The exchange rate hit its lowest price of the year at the end of March when it fell below $41 in the interbank market and is at its lowest nominal level in the last two years. The Union of Exporters of Uruguay (UEU) issued a statement where he warned of his “concern” and “considered it necessary to generate mechanisms to avoid abrupt and persistent variations such as those that have been taking place” on the exchange rate.

However, as he learned The Observer, in the BCU it was not under analysis nor was it an option to intervene directly in the foreign exchange market to send any signal. In the monetary authority they consider that, until now, there are no grounds to appeal to that tool. In addition, it was taken into account that the phenomenon of Appreciation of domestic currencies does not occur only in Uruguay but is quite widespread in the region.

Another of the variables that the authorities monitor is whether the policy of increasing interest rates that has been taking place since August of last year by the BCU has actually led to or encouraged the arrival of swallowed-up capital to carry out carry Trade, a practice that is used to earn money through the interest rate differential between currencies.

The strategy of these swallow capitals —short-term— consists of selling dollars in the local exchange market and investing in pesos —through the weekly auctions of monetary regulation bills (LRM) carried out by the BCU to obtain liquidity from the market— with the expectation of obtaining a good return, to then convert the amount back to the original currency. An eventual entry of foreign currency to the local market for speculative purposes can lower the exchange rate. However, until now this phenomenon is not taking place in Uruguay, since the proportion of LRM in the hands of non-residents is barely US$60 million, a figure that is considered negligible (1.2%) if one takes into account account that the current LRM in circulation is around US$ 5,700 million.

This phenomenon of carry trade it has been reported in Brazil in recent weeks, according to Brazilian media. In that country, the Central Bank raised the rate to 11.75% and analysts expect it to reach 13% by the end of the year, in an attempt to contain the inflationary pressures that are also hitting the region’s main economy. Inflation advanced 11.3% in the last 12 months to March, its highest level in 30 years. The Brazilian real has weakened 15.6% against the dollar so far this year.

In the Brazilian foreign exchange market, the dollar closed this Friday with a fall of 0.8%, to 4.70 real units per greenback.

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