Brazilian Real undervalued by 7% against US Dollar

BRICs all fundamentally undervalued 
The latest set of World Price Index (WPI) data illustrates the varying degrees that the currencies of the so-called BRICs (Brazil, Russia, India and China) remained significantly undervalued, in terms of purchasing power parity (PPP), against the US dollar in April. The reasons why their currencies buy less of the same basket of goods than the dollar are different, but this situation is unlikely to change for some time. 


Brazil’s Real strengthens by 6%
In April the undervaluation of the Brazilian currency moved from minus 13% against the US$ in March to minus 7% in April. This month the currency’s foreign exchange value was 3.68 Real to a US$ compared with a WPI rate of one US$ to 3.41 Real. This rise in the relative value of the Real represents a short respite after a long period of weakness. In December 2013 one US$ bought 2.08 Real, while two years later, in December 2015, one US$ bought just over 4.00 Real. 

Brazil’s currency has been undervalued in PPP terms against the dollar since March 2015 at which point the WPI exchange rate was 2.92 Real to one US$ compared to a market rate of 2.93. The economic woes facing the Brazilian economy include slowing growth, a balance of payments deficit and rising inflation which have resulted in a market depreciation of 38% of the Real against the US$ from March to December of last year. A significant part of economic problems facing Brazil have been attributable to falling commodity prices, but there has also been severe economic mismanagement by the government of Dilma Rousseff. 


Argentine Peso 0.7% overvalued
In sharp contrast to the currency consequences of poor economic policies in Brazil, the economic value of the Peso in Argentina, a formerly troubled Latin American economy continues to improve in terms of its PPP exchange rate. In April, the fundamental value of the currency came in at an overvaluation of 0.7%, close to parity, compared to an undervaluation of minus 10% the month before. This month one US$ acquired 14.69 Pesos while the WPI rate was 14.79 Pesos to one US$. 

Macroeconomic mismanagement in Argentina in recent years had led to a deterioration in the real purchasing power of the Peso which fell from a WPI rate of one US$ to 6.30 Pesos in May 2013 to one US$ to 12.30 Pesos by October 2015. Over this period intervention by the Argentine authorities kept the Peso overvalued against the dollar at the cost of rapidly using up the countries reserves and rationing access to foreign currency. The rate of exchange of Pesos to Dollars on official exchanges in Argentina fell from one US$ to 5.25 Pesos to one US$ to 9.44 Pesos over the same period. The election of a new President and the removal of exchange controls led to a sharp change in the relative position of the Argentine currency against the dollar. 


Russian Rouble 32% undervalued
The Russian Rouble remains undervalued against the US$ by 32%. In April, one US$ was worth 68.56 Roubles on foreign currency markets against a WPI rate of one US$ to Roubles 46.8. The undervaluation of the Russian currency in PPP terms has been caused by economic sanctions and the collapse in oil prices, but the purchasing value of the Rouble is also being undermined by rapidly rising prices. 

From January 2011 through September 2015 Russian food prices were largely stable with monthly fluctuations moving in line with the official exchange rate. However, over the past seven months, the price of food has increased at an exceptional rate culminating in prices being 46% ahead of prices paid a year ago. Food price increases have been driven by increases in both the cost of staple goods, and in the price of imported goods. One of the main reasons being international economic sanctions on Russia. 


China and India both undervalued
The currencies of the remaining BRICs – China and India – both remain undervalued by minus 20% and minus 34% respectively, In April, the Chinese currency’s foreign exchange value was Yuan 6.48 to one US$ compared with a WPI rate of one US$ to Yuan 5.15. There is unlikely to be any significant upward movement in the near future because of the People’s Bank of China (PBOC) need to stimulate flagging GDP growth by easy monetary policy. 

The Indian Rupee has been undervalued for several years against the US$ in PPP terms. In April, one US$ bought 66.58 Rupees, but the WPI rate was one US$ to 43.95 Rupees. This fundamental undervaluation is unlikely to change significantly in the near future with India running a persistent current account deficit alongside high GDP growth. 


About the World Price Index
The World Price Index (WPI) measures the value of an urban selection of goods and services at purchasing power parity (PPP), reflecting the real purchasing power of different nations, allowing for rapid and accurate international price comparisons. Under/Over valuation data is based on the difference between the exchange rate value of a currency and that of the US Dollar in relation to the World Price Index calculated exchange rate. Based on WPI global data the degree of currency under or over valuation in PPP terms by country is provided in the table and chart below.