MercoPress. South Atlantic News Agency

The sliding Brazilian currency has depreciated 18% in the last twelve months

The Real is the reference currency for many Latam counties

The Brazilian currency Real, which is the region’s reference, is undergoing one of its major depreciations against the US dollar in the last four years because of the poor performance of its economy and the tendency is to continue, at least in the short term, given the uncertainty about US monetary policy.

The Real ended trading on Tuesday at 2.4160 to the US dollars, the highest since March 2009, having lost 5.5% in the last thirty days and 18% so far this year. This has a direct impact on the Uruguayan and Argentine Peso, since Brazil is the main trade partner of both countries. In seven months the Argentine Peso official rate has devalued 12.16% while the Uruguayan Peso has lagged 8%.

This in practical terms means Brazilian exports are cheaper while those from Argentina and Uruguay become more expensive. To this must be added that fact that both in Argentina and Uruguay, inflation is running at a faster pace than in Brazil.

Brazil is also concerned about inflation and in July increased the basic Selic rate to 8.25% from a historic record minimum of 7.25% until last April. Inflation in Brazil in the twelve months to July was 6.7%. In Argentina official Indec 12-month inflation stands at 10.6%, but according to private estimates it is closer to 25%, while in Uruguay, 8.3% in the last twelve months to July.

The Real when it was one of the world’s strongest currencies supported by a massive influx of capital and foreign direct investment reached 1.50 to the US dollar.

The challenge now is that a depreciating Real could spur domestic inflation as imports become dearer but on Monday Finance minister Guido Mantega said the Brazilian government is ready to act if this is to happen.

Private estimates believe the Real could reach 2.75 to the US dollars in coming months, but Mantega did not support the forecast but admitted the volatility of the money market.

Another factor injecting uncertainty is the indication that the Federal Reserve is getting ready to gradually eliminate the monthly stimuli which could happen at the end of this year or early 2014, which must be added to the poor performance of the Brazilian economy, expected to grow in the range of 2% to 2.5% this year.

According to private estimates when the US Fed begins cutting back on stimuli Latinamerican currencies are expected on average to depreciate 6%, but by then the Real will have lost 18%.

In the last three months, according to the financial daily Cronista Comercial, the Chilean peso has lost 7.76%; the Peruvian Sol, 6.12%; the Mexican Peso, 6% and the Colombian Peso, 3.8%.