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8/28/08

Venezuela's currency slide: Mo' Moris

Well, I marked your card on this last week, so if you didn't do anything about it you've only got yourself to blame. The Venezuelan Bolivar Fuerte (VEF) has sunk around 20% in the space of just two weeks (click on any chart to enlarge).........

VEF parallel currency evolution, May 2006 to date

Here's the currency year to date. We can see the
exchange rate came down sharply, but has
recently started moving back up


The one month chart, with the recent rise clear to see

......with the slide coming right after the interview Moris Beracha gave Venezuelan newspaper 'El Nacional' on August 18th. Your dutiful Otto even translated the interview into English for you (link right here) last week, so readers here are on the cutting edge of intel, that's for sure.

The interview was one of the most interesting I've read for a while, and is almost certainly the catalyst for the 20% slide in the VEF since then. Really...I'm not joking. That's cos Beracha is the number one top dog king of the hill main man in Venniefinances these days, and his word is law. There's plenty to take away from the Nacional report, but maybe the main consequence was from this Beracha line

"...I don't think there will be another debt emission this year, unless it's in Bolivares (VEF)...."

because as soon as the VZ money minions read that single line they knew there was only hope and wishes holding the VEF down at the 3.2 to 3.4 range. The currency immediately (like that same day) moved to 3.5, and here we are with the VEF at 4.05 ask this afternoon. Yes, Moris really is that connected and that powerful.

Beracha was the catalyst for sure, but as this next chart shows, there are fundamental reasons behind this currency weakness, too.
Venezuelan Central Bank (BCV) stats show that M2 money supply (without getting boring on you, M2 is basically the money in circulation in any given economy) has ratcheted up sharply in the last few weeks, as the BCV has not been neutralizing the extra VEF by buying them back for dollars (as was the Beracha/Isea plan of previous months). Basically, the Gov't has been at the printing presses, and that means the currency comes under pressure.

The current U$75.18Bn (converted into dollars at the official 2.15/1 rate for convenience purposes only) in VEFs circulating in the Venezuelan economy marks a 5.7% increase in M2 in just 10 weeks. Now that may not seem like a lot to you, but currency-watchers know that's a seriously big move for M2 numbers in a relatively short space of time.

But the big question is, "Where is the VEF going in the next few days/weeks?" My best guess answer to that is "I think we'll see VEF4.5/U$1, then it will come back down a bit", and here's why:

With Venezuela's International Currency Reserves currently standing at U$37.49Bn, this means that we can do a very basic calculation and say there's an equilibrium point between the VEFs in circulation and the dollars kept in reserve that points to VEF4.31 as an optimum parallel exchange rate at present (you do this by dividing M2 by reserves, and then taking the resulting inflator ratio and multiplying the VEF's official exchange rate of 2.15 to the dollar...it goes like this: 75.18 / 37.49 = 2.005 X 2.15 = 4.31).

This calculation doesn't take into account any psychological influences of a population that's watching the VEF slide, of course. Therefore we may well see the VEF go lower before rebounding, and that's why I'm calling 4.5 to 1 right now. But as always, DYODD on this, dude.

Related Post
Moris Beracha and the Venezuelan Parallel Exchange Rate