What does it depend on and how will the value of the dollar in Cuba evolve?

The exchange rate is a ratio of exchange between currencies. In other words, it is the price of one currency expressed in another and, like any price, it fluctuates according to supply and demand.

In the long run, this price tends to balance out at face value equaling the purchasing power of coins, something that depends on the economic structure of each country. However, in the short term there are sharp swings due almost exclusively to expectations.

Based on expectations, people try to anticipate the market by adjusting their trading. A) Yes, if they expect the dollar to drop, they will try to sell theirs quickly, while they are still expensive, which will increase supply while reducing demand.

Expectations tend to become self-fulfilling prophecies: the preventive movement ends up causing what was believed to happen, but probably would not have happened without that movement. These speculative shifts often have no relation to the real economywhich is what in the long term defines that “natural” exchange rate around which the nominal pivots, which is the one observable in the market.

The recent and sharp appreciation of the Cuban peso (CUP) With respect to the dollar, it is a clear example of a movement caused by expectations, in this case, due to the almost simultaneous declarations of the Cuban Minister of Economy and the US president; all catalyzed by Trap announcements from domestic speculators pushing the dollar down.

But once the dust of this panic settles, what will define the relationship between these currencies will be the macro and microeconomic factors that describe the cuban economy. Let us organize them according to how they tend to favor the value of one or another currencyto try to predict how it will move in the future exchange rate.

Factors in favor of the value of the CUP:

  • Illegal emigration slows down.
  • Although not at the rate expected by the Government, tourism is recovering.
  • The state monopoly of foreign trade is maintained.

Factors in favor of the value of the dollar

  • The current account deficit is increasing.
  • Although there are no official figures, it can be inferred that the external debt is increasing with commitments that are soon due and at high interest rates.
  • One more year, the Castro model proves incapable of attracting foreign investment.
  • GDP growth will be lower than officially expected, and well below what is needed to enter recovery.
  • It continues betting on improving labor productivity by increasing wages, thus increasing the supply of CUP.
  • The Government has no capacity to offer dollars in the domestic market.
  • There are no banking mechanisms to control monetary circulation.
  • Cuban inflation will remain well above American inflation.
  • The shortage of supply of goods and services in CUP and the increase in the cost of that made in Freely Convertible Currency (MLC) remains.
  • MSMEs and the self-employed import much more than they export.
  • MIPYMES and the self-employed supply supplies with foreign currency, both in the illegal market and in MLC stores.
  • The fiscal deficit continues out of control, sustained with unsupported injections of money.
  • Agricultural production, the largest source of food supply in CUP, worsens due to the lack of inputs.
  • Neither there is nor is expected an increase in labor productivity.
  • The outlook for the world economy is gloomy.

Nothing can be concluded based on the number of factors per se, since a weighted analysis would highlight the relative weight of cooling demand for dollars due to the slowdown in illegal emigration.

All things considered, however, an honest forecast based on current factors would indicate that the value of the dollar will not fall for much longerperhaps it will not even reach 90 CUP, beginning in the next few days a slow comeback that will put it at the level of 100 CUP in less than two months, where, due to a psychological anchoring effect, it usually stays for one more month, and then continues climbing slowly but hopelessly.

Up in the air are the measures announced by Biden that, if materialized, will add factors in favor of both currencies, with a positive net balance for the value of the CUP, which could slow, but not stop, the dollar’s rallyat least up to a value slightly higher than 200 CUP per dollar.

Needless to say, what is exposed here is a conjecture; in economics it is possible to predict the direction of movements, but quantifying them is always and in any case a matter of approximate opinion, whether this journalist says it or any Nobel Prize winner says it. Keep this in mind if you will base your economic decisions as stated here.

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What does it depend on and how will the value of the dollar in Cuba evolve?