Venezuela parallel rate update

Here's the chart:

The latest from Hugolandia's finance scene is the Central Bank's honcho Merentes, who says that the country is committed to a stronger parallel exchange rate and is aiming for that previously announced 60% breach between the official Bolivar Fuerte (VEF) forex of 2.15 against the dollar and the permuta rate (which would mean it exchanges at 3.40 or so against the USD, not the current 5.30 to 5.50).

This is, of course, bullshit pie-in-the-sky and he knows it (if he doesn't WTF is he doing as head of a Central Bank?), so his speechifying can only be put down to either jawboning or LSD tablets. Just check the number of VEFs in circulation right now, compare it against currency reserves, do the math we've done here on many occasions previously and you'll see that a parallel rate under 4.5 is about as likely as Eva Golinger admitting she was wrong about Michael Moore.

The VEF got to 5 recently on the back of a very popular bond emission and then a slightly-less-popular-but-still-worked-fine bond emission. The fate of the VEF parallel rate is tied directly to the number of dollars in the country compared to the number of VEF...it really is that simple in the long run. Jawboning about super secret cunning plans to come is all well and good, but it won't ever move the market permanently. So here's what you have to remember:

Vz Govt issues dollar bonds = people buy dollar bonds with VEF = less VEF in circulation in country = stronger exchange rate.

VZ Govt doesn't issue dollar bonds = more VEF in the country = weaker exchange rate.

The rest is noise.

Quiztime! Which South American currency has strengthened by 29.3% against the dollar since August?

Here's a clue.

Watching dumbasses make fools of themselves over all things LatAm financial is my guilty pleasure, of course, but it comes triplesweet to read the stupidity written about the VEF in the last few weeks.

Stick to your myopic mumblings on inflation next time.

Understanding Venezuela financial experts

So Venezuela is selling U$3Bn in dollar bonds, most probably this week, to its local market.

Here's what local experts are saying:

The bolivar will likely extend its rebound in the parallel market in the run-up to the $3 billion offering, said Russell Dallen, head trader at Caracas Capital Markets at BBO Financial Services Inc. The rally may stall after the sale, he said.

“Once the new issue comes to market -- unless the government has some other ongoing plan up their sleeve to shore up the rate -- all bets are off and we would expect to see the bolivar return to its consistent path of devaluation and continued deterioration,” Dallen said.

And this is what it means.

"It's not fair! Thye're not playing by the rules! The VEF should have been at 10 by now, but don't worry, fee paying clients, we're still right even when we're wrong."

Otto sez: When you own machinery that produces 3.2 million barrels of oil a day, those barrels of oil cost $6 each to produce and you sell 3/4 of them overseas for over $60, you don't follow rules. You make them.

You may be wondering why the financial media haven't mentioned Venezuela's parallel currency rate recently.

The reason is that the Bolivar Fuerte (VEF) has appreciated by over 10% versus the dollar since the beginning of August.

As Insipid Bridges said on July 8th "Any further weakening of the Bolivar will mean problems for Chavez", so as the VEF has strengthened since then (from 6.6 to 6.22 vs the greenback), it therefore follows that this must be good news.

Therefore it isn't reported.

Mojitos served, the end.

Venezuelan parallel exchange rate update

Here's the chart:


Things have been fairly calm with the VEF/USD permuta "parallel" rate recently, with the range staying on or around the M2 vs reserves theoretical rate (see previous posts for more on that). This post is no more than a quick update and was inspired by a Google search that landed on site this afternoon using these keywords:

"Exchange my VEF currency in the US"

Some advice for my searchfriend:

1) Go to Miami
2) Know where your ankles are, because you'll need to be holding on to them very tightly if the transaction goes through at the rate you're offered in the USA.

Mojitos served. The end.

Venezuela parallel exchange rate update

Here's the longview chart of the Bolivar Fuerte (VEF) in the parallel "permuta" market....


......and here's the story since Jan 1st 2009.

click to enlarge

Yesterday Bloomberg picked up on the rumour swirling around that Chávez&Co is about to run a dollar bonds issuance. Bloomie reported a strengthening of the parallel VEF but I don't see much more than a slight stopping of the rot. Not surprising really, as the rumoured U$1Bn or $2Bn issuance won't soak up much of the excess liquidity floating round the VEF. Check out the evolution of M2 to see what I mean....

.....because this chart documents M2 having risen 32.5% since this time last year. Want a lesson in Monetary Inflation 101? Well, as mentioned before it's no coincidence that Venezuela's CPI inflation rate is fluctuating around 30% right now. This ain't rocket science, dudes.

So the upshot is that although oil is back at $70+ and the rrrrrrevolution is back on track funds-wise, the VEF currency has a long way to go to get itself repaired. My finger-in-the-air thinks that we'd need crude at $100/bbl again before the VEF parallel goes under 5.0 to the greenback.

Venezuela Parallel Exchange Rate Update

It's been a while and a lot has happened. First the charts, with this one......

....showing the long view of the parallel exchange rate of Venezuela's currency (VEF) against the US dollar and this one......


....showing what has happened so far this year. And the news is that the VEF is going ape, touching 7.1 against the greenback for the first time ever yesterday. This is due to a combo of the lack of liquidity after the US Feds closed down a big VEF moneychanger in Miami on drugs laundering charges (see Devilcaca at end March for more details on that one), the recent nerves about deval (again) and rumblings about a new dollar bonds issuance that may (or may not) fall flat on its face (more about that another day, but the name 'Beracha has suddenly become a popular search keyword, it seems).

All the above is, of course, underlined by continuing country inflation and an M2 level that indicates a theoretical equilibrium price for the parallel VEf of no less than 6.6 vs the U$ (see previous posts for a fuller explanation on that one).

Venezuela Parallel Exchange Rate Update

I've done a lot of mining posts in the last two days and they're getting boring. So here's the long overdue update on a chunk of macroeconomic commentary that's probably just as boring for all but about eight of you. However I know those eight or so like this subject, so off we go.

First, let's start with the Venezuelan Bolivar Fuerte (VEF) parallel headline rate. As carnaval is in full swing in Caracas there's been no trading this week so far, so the most recent price for the VEF against the dollar is 5.75. We can see from the chart that since the pre-Christmas hike it's stayed on or around that level.

If we look at the next two charts it seems that the above current level is about right, at least for the time being. This one shows the Venezuelan international currency reserves and please make note that this chart (for its own weird reasons) reads from right to left.

The main thing to note is the big recent drop (on the left) back down to the U$30Bn level. That was the withdrawal made by....well, made by Chávez really....to fund social programs going forward. Currency reserves are not a big problem here and the current $30Bn level is more than enough for a country of Venezuela's size and macro wealth.

We've recently had a whole bunch of blog-based Venezuelan 'experts' doing mutual handwringing sessions over that supposedly polemic withdrawal of reserves. These people seem to miss entirely the real point while preaching to their own little choirs. Venezuela's reserves are in good shape, but the next chart shows the problem.

This is the amount of money and quasi-money in circulation (if you like, imagine all the cash bills and all the virtual money stored on digitial and electronic systems in banks...that gives you the broadstroke idea). This money is called M2 by jargon lovers. Here we see that M2 has been increasing very rapidly over the last couple of years. This is a problem, because the money in circulation (in a soft currency country* such as Venezuela, at least) is, in theory at least, backed up by the reserves in the Central Bank. So if we start with every VEF backed up by a dollar but then suddenly double the amount of VEF in circulation and don't add any more reserves, it means that for every dollar there are two VEF and therefore the VEF loses purchasing power. In short, it causes inflation (e.g. you need more bits of paper to buy something worth one US dollar).

That's just a chunkette of very basic monetary theory for you, but the bottom line is; the more VEFs in circulation, the weaker the currency is. And right now if we do the necessary calculation, one US dollar in the Central Bank is covering 6.25 VEF. This explains (to a theoretical extent, at least) why the current parallel rate of VEF5.75 is so much higher than the official VEF2.15/USD1 rate the government does its business at via its CADIVI body.

There are other factors, of course. These things are never as cut and dried as economists would have you believe. Just as one example, with dollar inflation currently dropping worldwide we can expect less inflationary pressure in Venezuela as well. This means that the VEF currency is likely to hold up a bit better than 6.25 and kind of explains the gap between the current sub 6 numbers and the theoretical 6.25 number.

The question going forward for Venezuela is how to stop that money supply from growing even further and weakening its nominal value, because that's the cause of future inflation we're looking at right there (far worse than anything the USA might be about to experience). There are several answers; one is to "take money out of circulation". This can be done by emitting government bonds in foreign currency (presumably dollars) and exchanging those VEF on the street for nice pieces of paper that say the government owes you greenbacks. Fine in theory, but right now with oil so low it's difficult to see where the government can get its hands on enough dollars without tapping reserves. Another way of taking money off the streets is hiking banks' reserve requirement, a fancy way of saying to a bank "you dudes have to keep at least 10%/20%/30% of the VEFs you say you have on your books in your safes and don't let 'em out...or else you're in trouble".

Another possible is, of course, the devaluation that many are expecting. I also expect Venezuela to devalue this year, maybe moving the official rate to 2.9 or even perhaps 3.0 to the dollar. However I don't expect it just now and I've pencilled in the second half of the year if, and only if, oil stays below $65/bbl or so.

We shall see what happens.


*think of it as a currency that people don't like to save in

Bistromatics, Venezuelan edition

In my ongoing efforts to popularize the late Douglas Adams' stunningly perceptive concept of Bistromatics, my idea was to write a really long and wonky post about the problems Chávez&Co are unleashing upon themselves by tapping the country's international currency reserves to the tune of $12Bn, the money transfer coming up this month.

However there is good news: I've just been given a headsup that Quico over at Caracas Chronicles has just beaten me to it. And now the GREAT news; his post is much easier to understand on the subject than mine would have been, so please go over and have a look for yourself. Here's the link. But before I go, here are a couple of comments on his generally excellent article.

1) Quico is a raging Chávez hater and carries that message in everything he writes. So be it, I'm not my brother's keeper etc.

2) However, all the numbers and charts and stats he uses are, in my view at least, spot on. So Otto sez filter out the dogma, forget the politics on offer and concentrate on the fact that the numbers show Chávez is heading for an economic SNAFU. After all, Venezuela has always been totally addicted to oil and the same problems have shown themselves in any administration that lived through an oil price slump; this isn't something unique to Señor RedShirt.

3) I'd like to add this chart (which I cooked up yesterday) as this is just about the only chart relationship Quico didn't have that I would have used. It shows the Reserves-over-M2 rate compared to the real parallel exchange rate in Venezuela, January 2008 to date. It adds that final light blue spike to show where the reserves ratio predicts the parallel rate once the $12Bn is taken from Central Bank reserves.

You'll note that over the longer term the blue line has acted as a sort of anchor for the more volatile parallel rate. It's not an exact fit though, as other things affect the parallel market that live outside the world of theoretical economics and in the world of reality. For example in the April 2008 to July 2008 period the parallel rate was suppressed by bonds emissions that offered virtual free money for those lucky enough to be on board. Then when it became clear in August that there would be no more bonds delivered to market by Venezuela, the parallel popped back up (and overshot somewhat in my opinion). Then in the last few weeks we've seen extra pressure on the VEF due precisely to the recently announced policy of central bank reserves withdrawal. As the move was widely expected, the speculative pressure was already on the parallel VEF.

Really, this chart is just another way of presenting Quico's chart of the comparison to inflation data, but as the chart here is more pure monetary in nature it might be a better way to play. You be the judge. Anyway, all the above doesn't really stand on its own. To get the full idea of what's going on, check out Quico's really top class post. Here's the link again, just in case. now for that Bistromatics excerpt again.

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Bistromatics was created by Douglas Adams in the "Hitch Hikers Guide to the Galaxy" series. For those unacquainted with this important mathematical theory, here is the definition of the term as culled from the book:

The Bistromatics Drive is a wonderful new method of crossing vast interstellar distances without all that dangerous mucking about with Improbability Factors. Bistromatics Itself is simply a revolutionary new way of understanding the behaviour of numbers. Just as Einstein observed that time was not an absolute but depended on the observer’s movement in space, and that space was not an absolute but depended on the observer’s movement in time, so it is now realized that numbers are not absolute, but depend on the observer’s movement in restaurants.

The first nonabsolute number is the number of people for whom the table is reserved. This will vary during the course of the first three telephone calls to the restaurant, and then bear no apparent relation to the number of people who actually turn up, or to the number of people who subsequently join them after the show/match/party/gig, or to the number of people who leave when they see who else has turned up.

The second nonabsolute number is the given time of arrival, which is now known to be one of the most bizarre of mathematical concepts, a recipriversexcluson, a number whose existence can only be defined as being anything other than itself. In other words the given time of arrival is the one moment in time at which is impossible that any member of the party will arrive. Reciproverexclusons now play a vital part in many branches of maths, including statistics and accountancy and also form the basic equations used to engineer the Somebody Else’s Problem field.

The third and most mysterious piece of nonabsoluteness of all lies in the relationship between the number of items on the check, the cost of each item, the number of people at the table and what they are each prepared to pay for.

Numbers written on restaurant checks within the confines of restaurants do not follow the same mathematical laws as numbers written on any other pieces of paper in any other parts of the Universe….

Chart of the day is............

........the Venezuelan Bolivar Fuerte/US Dollar parallel rate, August 11th to date. Special delivery for those currently visiting Venezuela from foreign parts (e.g. Rafael Correa, da Borev etc)

We last looked at this about four weeks ago just after it spiked to 6.0. Since then it's been quiet, with the bid revolving around 5.0 or so. However, the last two years have seen the parallel rate dropping in December, probably due to a whole bunch of locals liquidating savings in order to buy 18 year old single malt scotch.

So for all you loyal (?) readers in Caracas (mostly) and Maracaibo (yeah...you...you know I mean you), Otto humbly suggests spending a few of those dollars in your salary cheques on VEFs and stocking up supplies of local moolah as soon as possible.

Chart of the day is............

..........the Venezuela parallel exchange rate, August 11th to date.

You see that spike late last week? You see this post I published at that very same time that said;

"Meanwhile, here's a message for (at least) seven readers I know that live in Venezuela and are fortunate enough to get their salaries in US dollars; tomorrow's the day, people....get yourself some of those cheap VEFs."

Toldya so. Another strange thing about the English media is that they'll relate with joy when the VEF sinks against the dollar, but to hear about a 10% strengthening you have to hit the blogs.