Exchange rate forecasts are famous for putting economists to shame. While predictions about the Brazilian Real — a notoriously volatile currency — are a particular type of sadistic joke. So it’s not much of a surprise that we market economists got them wrong once again.
So far in 2022, the Real has strengthened significantly against most of its peers and the U.S. Dollar. It is up almost 30 percent relative to an index of major emerging market currencies and around 15 percent against the greenback.
Rewind to the beginning of the year, and the median forecast according to the Central Bank’s Focus Report (a weekly survey with top-rated investment firms) expected the USD-BRL rate to hit 5.60 by the end of this year. Virtually none of the respondents expected the currency below BRL 5 to the dollar; my own forecast of BRL 5.20 : USD 1 was one of the few betting on a stronger Real, and even that is now off by more than 10 percent.
Curiously, economic models using variables such as commodity prices, interest rates, and country risk had been showing that the Real was extremely cheap for several months, but foreign flows — loosely defined as the sum of the current account balance and investments in the country — were missing. Until very recently.
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