Constant dollars

Costa Rica Colon strengthens against the US dollar

QCASTARICA (the Nation) In October and the first days of November, the Costa Rican colon remained strong against the US dollar. The price of the currency each day started to be lower than the price it had on the same day of the previous year, which generates a negative variation from one year to the next.

For example, on November 3, 2022, the average dollar price on the Monex market was 627.72¢; 2.2% less than the price it had on the same day in 2021, which was 641.99¢.

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One of the implications of this behavior is that it makes the colon more attractive as a savings currency relative to the dollar, which is bolstered by rising colon interest rates for savings.

For example, the passive rate (for savings) traded in colones, which is an average of the returns of money at different maturities in the financial system, increased from 3.53% in November 2021 to 9.41% on November 1. 2022.

In the case of dollar savers, if a person receives income in colones and spends in colones, and has savings in dollars, the income he receives now is enough to buy fewer goods and services than there are. one year old.

However, this is offset by rising interest rates. For reference, the passive rate traded in dollars, which is an average of the returns of the currency at different maturities of the financial system, fell from 1.96%, in November 2021, to 2.96% on November 1, 2022.

Freddy Quesada, director of INS Valores, said savers should also consider that currently currencies around the world are losing value against the dollar, mainly due to the rise in rates by the Federal Reserve, which makes it more attractive to invest in this currency. , taking into account the risk-return assessment.

“The appeal of saving in dollars or colones is related to the duration and purpose of the investment, because although there are extraordinary opportunities for investments in dollars, the premium for investing in short term has also increased significantly, so the element that tips the balance depends on the type of investor,” added Adriana Rodríguez, general manager of Acobo Puesto de Bolsa.

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For dollar debtors, who receive income in colons, the appreciation of the colon benefits them because they now need fewer colons to buy the foreign currency they need to pay the installments compared to a year ago. one year, assuming that the rate remains constant, but there are still to consider that the rate has increased.

For reference, the average active rate (for loans) traded in dollars, in the financial system, fell from 5.31% in November 2021 to 6.86% at 1°. November 2022.

Why did the colon get stronger?

Freddy Quesada cited three reasons why the colon appreciated against the dollar: the increase in interest rates in colons, the drop in the price of oil and the influx of dollars from the Latin American Reserve Fund ( FLAR), or $1.1 billion received by Banco Central (Central Bank) on August 19.

The director of INS Valores added that the Central Bank has implemented an aggressive increase in the monetary policy rate (MPR), which has motivated some investors to shift investments from dollars to colones, which puts pressure on the sale. of dollars. , mainly at bank counters.

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Regarding the decline in the price of oil, Quesada indicated that in the last three months the price of crude oil has fallen from levels above 100 USD to around 85 USD, which reduces the purchase of dollars in the local market. ; and the entry of FLAR resources generates an expectation of abundance in the market, even if basically it is not necessary to make efficient use of them.

Rodríguez, for his part, indicated that the exchange surplus has resurfaced in a significant way, where September presented a historic record surplus of dollars sold compared to those bought.

“This increase in market surpluses has a variety of reasons, ranging from speculative financial movements which encouraged the selling of dollars at perceived high levels, foreign currencies being sold off to take advantage of better interest rates in colones, retirement operators leaving from the retail market to the wholesaler, even the lesser need for dollars from the non-banking public sector, which implies a lesser need to replenish foreign currencies from the Central Bank in the wholesale market Monex,” Rodríguez said.

Will the trend continue?

Rodríguez and Quesada explained that the price of money depends on many factors that can make it vary at any time in one direction or another.

Rodríguez explained that this year the price of the currency has experienced high volatility associated with a particular economic context: sudden financial movements inside and outside the country, high inflation rates and strong geopolitical tensions.

“Any of these can influence the exchange rate trend to one side or the other, however, November tends to be a month with a greater supply of foreign currencies, which can ease pressures. on the upside in the short term,” Rodríguez said.

Quesada, for his part, explained that Costa Rica is a small open economy that could at some point be influenced by external situations such as political tensions, armed and commercial conflicts, among others.

In addition, a strong settler against the dollar could deteriorate the terms of trade of Costa Rican exporters, ie the relationship between the price of sales made abroad and the price of their imports.

Patricia Leitón’s article was originally published (in Spanish) in La Nacion. Read the original here.

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