Jump to content
Sign in to follow this  
fpapia

Exchange Rate Going Up Every Day... Why?

Recommended Posts

This may be a bit 'off topic' but does anyone know why the exchange rate is going up every day now?

 

For a few years it was stable around 499/503 per dollar. As of 20 minutes ago it was 570 per dollar at BCR.

Share this post


Link to post
Share on other sites

I think the USA is slowing down the printing of dollars and therefore increasing the value. Old law of supply and demand, nothing to do with the election.

Share this post


Link to post
Share on other sites

Many Ticos are having financial issues now that the exchange rate has been climbing. Funny, they were smiling all the way to the bank a month ago, <_< In the mean time most expats were having to deal with a rate that was persistently below ¢500/1$.

 

My rent is in colones but my landlady has asked if I wouldn't mind paying in dollars. She is offering to split the spread between the buy and sell rates so it is a good deal for each of us.

 

The market for the CRC is very small. It is not really much of a globally exchanged currency although anyone can speculate in any currency. It usually does not experience much external influence because the CRC is not needed for global commerce. You have to keep in mind that the CRC really only has value in CR. To buy or pay for anything outside of CR Ticos most generally deal in the USD.

 

For years the BCCR has been manipulating the exchange rate by selling USD into the CR market to attempt to keep the exchange rate stable at around ¢500/1$. For some reason either the BCCR efforts are not working or the BCCR has curtailed their efforts. According to the BCCR website they are continuing to sell USD. But I have to wonder if that is true.

 

There recently was a scare with the currencies in some so called emerging markets like Turkey and Argentina. This caused a flight of investments in those currencies as well as other currencies into safer markets like the USD. Despite this, the exchange rate between the USD and other global currencies like the Euro and the GPB has been falling. Also, like SCORP mentioned, the US Federal Reserve has been cutting back on the purchase of US backed securities and thus, printing fewer $$. Despite this, the USD continues to fall a bit in relation to other currencies The phenomenon of a big rise in the USD is unique to CR.

 

I have not seen a huge change in the economic activity in CR that would require a big increase in the need for USD in CR. This leads me to believe that the CR govt. is to blame for the falling colone.

 

You can check the exchange rates between currencies at XE,com . I find the charts make it easy to visualize changes over a period of time. Have a look at the USD vs colone and USD vs other currencies.

Share this post


Link to post
Share on other sites

Do you suppose, Mark, that the Central Bank (BCCR) is purposely allowing the colón to float free again against the dolar maybe to somehow influence that upcoming election run-off?

 

Is it possible that by BCCR doing so, it could make one or the other presidential candidate look better or worse, thus causing ticos to lean more one way than the other when voting?

 

Just a thought. And since I am not much politically inclined, maybe this suddenly changeable tipo de cambio really has nothing to do with my suggestion above.

 

¡Puro Tipo!

 

Paul

==

Share this post


Link to post
Share on other sites

Correct Mark,

Interest rates are the single biggest influence on currencies and with the U.S. Federal Reserve decreasing stimulus for the foreseeable future, interest rates in the U.S. should continue to rise. Secondly this is all being done because of further economic growth in the U.S.

That being said, U.S. interest rates are very influential on money flows in many small countries across the globe and any further contraction of money supply by the Federal Reserve will increase that siphon rate out of these countries.

Costa Rica is no different than one of those small countries. For a couple years the Costa Rican Central Bank kept the dollar from falling any lower than 500. There was never an attempt to keep the dollar from rising. Also I've heard of some noise concerning Costa Rica penalizing foreign interests from moving dollars to Costa Rica for pure investment in Colon accounts. The combination of these events has propelled the dollar a clear 12 percent higher since the 1st of the year. I would expect further dollar increases in the months ahead, these movements take on a life of their own after awhile with people fleeing the Colon in favor of the Dollar. How far we overshoot and then settle in? Who knows. But I'm thinking well over 600 before it's over. 585 to 590 should have some resistance.

Share this post


Link to post
Share on other sites

One reason that the Exchange rate is favoring the dollar is the fact that the Costa Rican government is bankrupt - This means that they owe great amounts of money for the bonds that they have sold on the world open market, and the interest that they must pay on those bonds - They are printing more money than they can back, degrading the value of the colone! Also, it appears that it is a lead pipe cinch that they'll miss their payment of the $55 million dollars that The firm (OAS) (which has the contract for the San Ramon/San Jose highway) has asked for prior to March 15 and well be taken to arbitration by OAS for their rightfully due $555 million (in accordance with the contract provisions for breach of contract). Also, Ruta 32 - the government doesn't have the $90 million to approve the Chinese contract (which would be a travesty for Costa Rica) . Right now, exporters have the advantage, while you'll see a continuing increase in the price of imported goods - Also, I for see them wanting to tax foreeign residents!!

Share this post


Link to post
Share on other sites

Its really not in the interest of the CR central bank to let the colone fall against the dollar. They would probably prefer it to go the other way, C400 or C300 to the dollar? But that is very unlikely to happen.

But thats not the way it happens on the international market, people are busy buying up dollars because of various events happening around the world (Ukraine, etc), so currency speculators here are dumping the Colone and buying dollars. Thus the $ goes up compared to the C.

Share this post


Link to post
Share on other sites

I'm not a financially savey person but have lived long enough to realize you can't keep printing money (USA) without consequences.

Same goes for CR. Does anyone else remember 1973 when we had a government mandated "WAGE & PRICE FREEZE" (NIXON ADMINASTRATION). 18 percent inflation. You could not get a pay raise (wage freeze) while your take home pay was worth 18 percent less than you used to take home. For every $100 take home you only had $82 spending money. I believe we are about to see the OTHER SHOE drop. HOPE NOT, BUT

Edited by ronofboston

Share this post


Link to post
Share on other sites

Actually the Central Bank of Costa Rica wants the dollar to strengthen against the Colone. Be it gradual not to fast. Reason being, keep hot money from flowing into Costa Rica and causing a future disruption to the economy. To make CR's exports more competitive. Discourage import consumption.

That is why the Central Bank of Costa Rica did not allow the dollar to fall under 500 Colone. It would have gone to 400 or 300 possible if not so for the intervention.

Share this post


Link to post
Share on other sites

At the ARCR seminar they mentioned import duties make up 50% of Costa Rica's (tax?) revenue which explain why it is such a big part of the expat with stuff to bring life. I was wondering what effect exchange rates had on that equation. Are the import duties valuated and paid in dollars? If in dollars, wouldn't say a $20,000 car imported from the US generate more colones tax revenue at 600 than 500?

Share this post


Link to post
Share on other sites

Since the tax is done by percentage, it really doesn't matter what the currency used is. In theory (after Colone depreciation), if people kept importing the same amount of goods, in Dollars, then they would pay more taxes in Colones (or if in Dollars, more Colones after exchange, same thing). BUT, often time less imports are consumed because of the increased cost or goods in Colones. Thus giving a competitive edge to local production and consumption.

Share this post


Link to post
Share on other sites

My thoughts follow a more cynical path. I agree with many of the opinions already expressed, however, I think that there is a simpler explanation.

 

The foreign exchange market or forex market as it is often called is the market in which currencies are traded.

 

 

So what happens if some of the BCCR administrative officials make an agreement with a few of the diputados? Both groups go Currency Trading. Let us assume that they set their positions five or six months ago. Some shorting the dollar and some going long on the Colon.

 

 

Since currency trading is one of the world’s largest markets, consisting of almost $2.5 trillion in daily volume, their positions would not have an appreciable effect on the overall market. Once their spots were in place they begin ‘unlinking’ the USD from the Colon so that over a period of time their positions would become extremely valuable.

 

 

These individuals cannot manipulate the forex; they can, however, manipulate Costa Rica’s position within the forex. The façade they use to cover their activities are the ideas expressed above.

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
Sign in to follow this  

×

Important Information

By using this site, you agree to our Terms of Use.