USD v. CRC

[Sam Wilson]

LiCR,

Well, hopefully we are seeing the start of a trend where the USD/CRC exchange rate improves for those of us earning dollars and spending colones.  It has been a rough year!  Heck, we are even below where we were 5 years ago:

Even with the little uptick we've seen since the end of April, the dollar is still down over 21% the past year.  It looks like we're now bumping up about 2.6% since the end of April.  To celebrate, I went out and bought 2% more chicken for the family to eat!  jajaja.  At least inflation in Costa Rica seems to be easing a bit.  The coffee we buy has dropped from ¢3600 for half a kilo to now ¢3350, however beers at our local bars are still almost double what I was charging when I had a bar 10 years ago.  I've resorted to drinking hard licor and playing math tricks on the bar maids just to stretch the fiesta funds a little.  Yes, I have no shame...  jajaja.  Sin embargo, I reason that the money I save is for my kids' future, so there is higher moral ground involved.  ;-)

I hope everyone is doing well.

--

Sam

[Joe Harrison]

That is encouraging news.  Methinks I'll go and buy 2% more vino para celebrar, although I'm not sure exactly how to pull that off.  Maybe I'll make it 200% more.  Easier to do that and it demonstrates my faith in the future.

What I really don't understand is WHY the colon has been so strong lately.  Can you (Sam, or anyone else) explain in non-economist lingo why?  

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[Sam Wilson]

Hi Joe,

Good question!  I've been wondering the same thing for the better part of a year now as I've watched my hard-earned cash buy less and less...

My guess was that the US was forcing the weaker dollar to promote exports.  But I have a hard enough time trying to figure out how to guess which way regular stocks will go without all the subterfuge of intercountry economic relationships.  For what it's worth, the EURO v CRC chart has shown a somewhat trend over the past year:

I recall one of the guys on one of the CR forums being a big Forex guy.  If I can recall who, maybe we can invite him to be a guest lecturer and 'splain it to us plebes?  jajaja.

Hmmm... you might be onto something with the wine thing.  I mostly quit drinking beer towards the end of last year thinking rum would be healthier and plus it fits in with my sailor schtick.  But lately, I've been hitting that a bit too hard and not liking that so much...  You buying the Clos in a box wine?  Or in San Ramón do you guys have better options?

--

Sam

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[Joe Harrison]

You got it right Sam:  Clos blanco in a wine box, preferably 2 litres!!!  Chilean wine is pretty good, and a much better value than what's available here from Napa Valley.  

Those recent trend lines (Euro and USD vs Colon) seem quite similar.  I'm wondering if the Colon is somehow artificially propped up?  It doesn't appear to be political, as the system here seems to be isolated from politics, so I continue to wonder and, like you, suffer since most of my pitiful income is in dolores (misspelling intentional) jijiji.

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[jlc]

On Mon, 26 Jun 2023 14:49:00 -0600
Joe Harrison <joeharr...@gmail.com> wrote:

> That is encouraging news. Methinks I'll go and buy 2% more vino para
> celebrar, although I'm not sure exactly how to pull that off. Maybe
> I'll make it 200% more. Easier to do that and it demonstrates my
> faith in the future.
>
> What I really don't understand is WHY the colon has been so strong
> lately. Can you (Sam, or anyone else) explain in non-economist lingo
> why?
>

This is what I was told, by someone who should know, but I haven't
verified it.

Earlier this year SUGEF, the financial regulator, banned the investment
of retirement funds outside of Costa Rica. Additionally, they required
the funds that had money invested outside CR to repatriate it.

This dried up a large part of the demand for USD and then as the money
flowed back into the country caused a glut on the market of dollars.

That is why the dollar dropped dramatically against the colon.

I suppose if someone is sufficiently interested they can search La
Gaceta and find the relevant decrees.

--jorge

[Joe Harrison]

Thanks Jorge.  That makes more sense than anything I've heard before.  Basically, too many $$ here, compared to colones.  Ha sentido.  I have no idea if that was a wise decision economically, surely it was nationalistic and probably short-sighted, but since I avoided the study of econ as much as possible in both university and grad school, I'm not a good judge of that I guess....

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[Don Hickman]

I have a minor in Econ and I recommend buying more wine!

Don 

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[Joe Harrison]

Fantastic advice Don!  And as you can see, I'm planning exactly that, even with no knowledge of econ!!!!

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[Don Hickman]

There's a reason Economics is called the dismal science.

Don

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[Sam Wilson]

Yep... after hurting my head for an hour or two trying to find Jorge's reference and get a better handle on what makes the Forex markets move, I've settled on blaming it on Soros and lack of wine.  Of course, we can also lay a bit of blame at Joe's feet from his time in the Nixon administration. Nixon is credited with ending the old Bretton Woods Accord which the Allied nations agreed to in 1944 before the end of WWII regulating the international monetary system (establishing the IMF, etc.) At the time the US controlled 2/3rds of the World's gold supply and so the system was based on the US dollar and gold. It established fixed rates of exchange between currencies and worked pretty well until Nixon and crew terminated the gold standard, rendering the dollar a fiat currency. After that most fixed currencies around the world became free-floating which led to the system we have today.  Unfortunately the USD/CRC is such a miniscule part of the world's biggest financial marketplace (Forex market is about $7.5 trillion/day) that none of the analysts seem to have any opinions or forecasts about it that I could find.

That leaves us with... this Neil Diamond classic, or better yet, the more famous UB40 cover:

UB40 - Red Red Wine (Live at Montreux 2002)

https://www.youtube.com/watch?v=SYQ1lkP1j_g

--

Sam

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[Don Hickman]

Yes, Nixon.  As I recall, there was a balance of trade problem.  We spent more overseas than other countries spent in the States.  Then those countries showed up at the Treasury and wanted their dollars exchanged for gold at the then price of $35 per ounce.  Our gold supply was rapidly dwindling so Nixon slammed the gold window shut.  I bought my first 5 oz gold bar for $200!  A few years later a client gave me my first American gold eagle worth $400.  Today . . . more wine please.

Don

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[Sam Wilson]

LiCR,

While I expect Jorge's observation about Costa Rica clawing back investment funds has had an effect of strengthening the Colon similar to the way a stock buyback would strengthen a company's share value, I suspect the carry trade business and Latin America being out in front for once on the inflation battle has significance here...  Maybe Rodrigo is more to blame for this than Joe?  jajaja.

The Carry Trade is a major way for currency traders to make money.  And this technique has been particularly attractive for many trading Latin American currencies the past year.  The basic idea exploits an interest rate difference between stable economies largely driven by relative inflation, where one can borrow money in the lower interest rate currency and buy money in a higher interest rate currency and profit nicely from the difference. One can profit hugely when doing this on margin.  Forex.com has a good explanation of how this works here:

FOREX.com - How to use the currency carry trade strategy

https://www.forex.com/en/market-analysis/latest-research/currency-carry-trades-explained/

In their example, they show a theoretical carry trade between the Australian Dollar and the Japanese Yen assuming an Australian central bank rate of 3.6% and the Japanese Yen set at a 0.1% interest rate - a 3.5% rate difference.  You sell JPY to buy AUD.  If the rates remain stable, one could gain 3.5% in one year - a $100,000 AUD position grows to $103,500.  However, doing this on a 20:1 margin means you only need $5000 AUD to open a $100,000 AUD position in order to make that same $3500 AUD gain.  As I'm sure Econ Don would agree, making $3500 on $5000 is a HUGE profit - a 70 freakin' percent profit!

So is there such a market between USD/CRC?  Probably.  Obviously a much, much smaller market than the AUD/JPY market.  The GDP of Costa Rica is about 1/8th the size of that of Dallas...  But look at what has happened to US and Costa Rica interest rates and inflation over the past year.

  

A coincidence that the USD/CRC exchange rate has started getting a little better about the time Costa Rican interest rates started easing?

Costa Rica, and much of Latin America got out in front of inflation much faster than did the US.  Costa Rica is right now down to about where it has historically been inflation-wise over the past almost 10 years while the US is still at around double the inflation rate it has been flirting with the past 10 years...

  

I've been paying more attention to propagating orchids than interest rates lately, although as noted previously I have noticed coffee prices coming back down a little lately.  As I look at this data it appears to me that Rodrigo has been doing a decent job setting Costa Rica up for a more prosperous future.  I truly hope so.  My little Ticos are depending upon it.  Now if he could only get better control over the education system.  Our kids have only had 2 or 3 days of classes since last week and yet again no classes today...  grrrrrrrr.

Since society has been running quite low on kings these days, I'm tempted to suggest a change to the dictum popularized by the French Revolution substituting in unionized teachers and school administrators...

"May the last king be strangled in the bowels of the last priest"

--

Sam

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[Joe Harrison]

With my name being taken in vain and my role in the Nixon Administration vastly overstated, please allow me a few comments.  In that era, I was in my mid-20's, and hardly in a policy-making job.  I was, in fact, consigned to what was then the Post Office Department.  But that is where one of the two most successful proposals of his Administration took place.  This was reformation of the extremely political POD into the present-day USPS, a self-supporting business oriented organization of the government.  I did play a significant, if minor, role in achieving that outcome.  (The only other great success I can think of was Nixon's opening of a relationship with China, which I think is extremely important.)  These successes are overlooked in the aftermath of Watergate. 

As to the gold standard and all that, I ain't got no idea and I leave that to you all.  I'm just happy if the price I have to pay for wine drops by a few colones....

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[Don Hickman]

Who took your name in vain???   But, upon reading about the ¨successful proposal¨ of the USPS, I may!

I realize that we can define ¨success´ in different ways but from 2000 to 2010, the USPS lost money in 6 of those 10 years.  In 2021 it lost $5 billion but that´s down from the $9.2 billion it lost in 2020.   In fact, from 2011 to 2021 it lost $69 billion.

The China thing has gone well also.  Lol.

Now I have to go out and buy some more wine before the price goes up further.  Here´s to success!

Don

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[Joe Harrison]

But, Don, the idea behind USPS was noble!  Every single postmaster in the US had theretofore been a political patronage appointee since the memory of man runneth not to the contrary!! And most POD funding was from direct appropriations.  What they didn't count on were the rapid advances in technology and competition, rendering postal services much less useful now.  USPS still serves an essential, if limited, role that probably only a govt agency can provide and if Congress is willing to appropriate funds to offset the deficit, so be it.  Otherwise, the cost of postage would be even higher. (I don't know what it is today; haven't used it in 13 years.) 

As to China, obviously they are not an ally, but having some sort of relationship is, to me, far better than having such a huge competitor in isolation.  We can do that with N. Korea, but with a nation as powerful as China that would be fatal on a global level.  Yeah, Nixon made the right call on this.

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[Don Hickman]

I have no disagreement that the idea was noble.  Or something.  But it simply didn´t work out.  I also have no objection to the govt furnishing a cheap method of postal service, especially to rural areas that wouldn´t otherwise be served by UPS, FedEX, etc except at high cost.  Of course they didn´t think about technological changes, etc.  No govt agency ever does!   Except  for the atomic bomb I can´t think of much that the government has ever innovated, other than graft and corruption of course!!  Lol.

As for the cost of postage these days, I just read where it´s going to 66 cents for a stamp starting next month.  I remember a penny postcard!

China we can disagree on.  There are arguments either way.  From my point of view, China wouldn´t be nearly as powerful today as it is if we hadn´t sent our manufacturing over there.  Doesn´t make sense to me that 90+% of all our drugs are made in China.

As for Nixon himself, I thought he got a bum rap on the Watergate thing.  I watched those Senate hearings.  But taking us off the gold standard and creating our fiat currency was the beginning of a long downfall.  Not that keeping the gold standard would have resulted in a better situation.  Governments simply can't resist buying votes so the Hobson's choice was run out of gold or just inflate the currency.  Same result eventually.

Enjoy that Social Security check while you can!  Is it time for wine yet?

Don

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[Joe Harrison]

It's always time for a glass of wine.  I tend to whine when I don't get mine.  I'm late today; classes got in the way.  But now I'm fine; bring on the wine.   Substantive reply to follow, maybe.

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[Don Hickman]

Lol.  Let's just stick with the wine.

Don 

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[Joe Harrison]

I'll take that advice; don't have to think twice!

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[Sam Wilson]

LiCR,

Looks like maybe? just maybe? the USD/CRC exchange rate is starting to get a little better for dollar based persons in Costa Rica:

Still a long way off from ¢696 CRC / $1 USD (midmarket rates) about 13 months ago...

INEC's most recent report on prices indicates that prices in Costa Rica have been going down since February.

Índice de Precios al Consumidor - agosto 2023

https://admin.inec.cr/sites/default/files/2023-09/reEconomIPC082023-08.pdf

Just doesn't feel like that everytime I go to the grocery store...  Guess it's not hard to figure out where most of my money goes...

Hopefully better economic times are ahead for all.  If not, at least it looks like my grapes are starting to get a little blush thing going on as they mature...

The purplish ones are sweet, sweet!  The green ones are still ácida.

--

Sam

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[Sam Wilson]

LiCR,

Another important indicator of things looking up... Unemployment is less than half what it was 3 years ago:

INEC - Principales indicadores del mercado laboral 

https://admin.inec.cr/sites/default/files/2023-09/coECE_MJJ2023_07092023.pdf

--

Sam