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Venezuela parallel rate update

About time we checked out the progress of the parallel rate. Here’s the main chart….

..showing the recent action, April 2009 to date. And what we see is another case of “not much happening”. This morning the ask is at VEF6.82 for a dollar, by the way (much to the chagrin of dumbass doom prophets). But as is our wont, let’s check out a couple of the main underlying fundamentals that explain why the permuta VEF is where it is. First the evolution of international currency reserves in Venezuela…

…and please note that this chart (for my own screwy XLS reasons) reads right to left. So right now Venezuela has U$30.69Bn tucked away in its reserves pouch. That’s a tidy enough sum. However, the good news about reserves is outweighed by the bad news in the next chart:

As a quick reminder (we’ve done this one before) “M2” refers to the money in circulation in the country, both in the form of physical bills/coins and the money kept in the banking system (your savings amount desposit total, for example). In other words, M2 is basically “how much money there is in the country”.

So in the above chart, we see that M2 has risen from the VEF equivalent of U$88Bn in April to VEF eq U$97Bn in July. People, that’s a LOT. This means there’s 10% more currency floating round Venezuela than there was just three months ago. M2 growth is acelerating since the last time we looked at it, from around 30% per annum to around 43%. This means that Venezuela will come under further inflationary pressure, sad to say.

But back to the parallel rate for a moment: Right now the rate stands at 6.82/1 and this is backed up by monetary theory. If we divide M2 by reserves and then multiply it by the official exchgne rate to get the VEF equivalent, the answer 6.82 pops, out, which is right on the button at the moment. However as the trend is for M2 to grow faster than reserves, the chances are that the parallel rate with continue higher and break 7 in the months to come.

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