Uruguayan peso now the strongest currency in South America

Jun, 22, 2022 Posted by Gabriel Malheiros

Week 202225

The Uruguayan peso has appreciated consistently this year, to the point of overtaking the real as the best-performing currency in South America, according to Bloomberg. The dollar fell by 10.4% until June 14, 2022. On that day, the dollar closed at 40.04 pesos, having started the year at 44.61 pesos.

In Brazil, which is also the benchmark foreign exchange market at a regional level for Uruguay, the real has appreciated so far this year by 8.3% over the dollar until the 13th.

Uruguayan currency now has the best performance in the region in 2022

According to Linea Nicolás Cichevski, manager of Economic Analysis at CPA Ferrere Consulting, one of the elements explaining the strengthening of the Uruguayan peso is the increased supply of dollars in the local market as a result of foreign currency revenues. This is set to continue, as foreign prices are not expected to reverse, at least in the short term.

“The factor behind the dollar being quite stable in Uruguay is that export prices and volumes remain at record levels. Naturally, this ends up putting pressure on the dollar here”, said the economist.

The increase in commodity prices that occurred this year also kept prices high, which were already high at the end of 2021. Uruguayan exports reached US$ 5.5 billion in January-May, an increase of 40% compared to US$ 3.9 billion in the same period of the previous year.

According to the manager of CPA Ferrere, the market’s size, “smaller” than Brazil’s, avoids the fluctuation levels that occurred in Brazil in recent days due to the uncertainty caused by US inflation figures, which reached 8.6 percent and were above expectations.

“In Brazil, where the market is much larger, capital flows are also much larger, resulting in more volatility because as capital comes in, the dollar falls, and when it exits the country, the dollar rises. In these processes, Uruguay is marginally more expensive. When the dollar falls elsewhere, it falls in Uruguay, but the rebound is much more gradual,” explained Cichevski.

Marcelo Sibille, manager of Economic Consulting at KPMG Uruguay, told Bloomberg Linea that there is an increase in dollar revenue due to the rise in the price of grains. However, he stated there is also higher production due to importing raw materials such as oil. “Currently, I don’t see the migration of the dollar flow as being intense,” he said. “What can happen is a portfolio change. I imagine this is what most influences the increased demand for pesos from resident agents,” he added.

In turn, Cichevski also included political stability as a factor that gives the Uruguayan peso less volatility to its neighbors. “It is challenging to determine what is due to what, but it is also true that Brazil has elections ahead, Chile has the Constituent Assembly, and Argentina is in chaos. So, in general terms, if you look at Uruguay, there is a certain stability in political and economic terms that ends up giving a little more solidity.”

Future and taxes

The success of the Chinese economy, the main destination for Uruguayan exports, and the Fed’s response to excessive inflation in the United States are the topics to pay attention to in terms of the future of pricing. A deeper rally could trigger a reversal of capital from emerging markets to the United States.

According to the manager of KPMG Uruguay, “it is not so clear” what will happen between now and the end of the year because both the US Federal Reserve and the European Central Bank could very well raise interest rates, causing the rate difference to narrow and  promoting “a certain reversal in the behavior of exchange rates.” “The peso trend was steep, which is not sustainable in terms of macroeconomics and competitiveness. For example, the exchange rate was 44 pesos/dollar five months ago. After that, the decline was of one peso per month,” he concluded.

Bloomberg Linea

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