THE dollar closed the first trading session of May above BRL 5.07, following the jump in US debt yields to the highest levels in several years this Monday (2), ahead of this week’s monetary policy meeting of the Federal Reserve, the central bank of the United States, in addition to the expected increase in interest rates in Brazil.
After reaching R$ 5.0881 at the peak of the session, a jump of 2.93%, the spot dollar closed up 2.58%, at R$ 5.0712 on sale. This was the biggest daily appreciation since April 22 (+4.07%), the date on which the most intense increase in the American currency was recorded since the beginning of the Covid-19 pandemic. The currency also reached the highest level for closing since last March 16 (R$ 5.0917).
On B3, at 17:07 (Brasília time), the dollar futures contract of the first month rose 2.10%, to R$ 5.1230.
The US central bank is expected to raise interest rates by 0.5 percentage point at the end of its two-day meeting on Wednesday (4), which would represent a hardening of its stance on fighting inflation. In March, the Fed raised interest rates for the first time since 2018, but in a milder dose of 0.25 point.
This prospect of more aggressive monetary tightening boosted US sovereign bond rates, with the ten-year Treasury yield, the global benchmark for investments, topping 3% for the first time since December 2018.
That, in turn, fueled the rise in the dollar index against a basket of strong currencies to close to a 20-year peak recently reached, in a move that, according to Felipe Izac, a partner at Nexgen Capital, is not isolated this session, but It’s been since the last week.
At the same time, currencies of emerging countries fell sharply on Monday, with the South African rand and the Chilean and Colombian pesos each falling more than 1%. Izac said that the devaluation of this type of currency reflects, in addition to fears about the Fed, fears of an economic slowdown in China, which could undermine activity in the rest of the world.
interest in Brazil
In addition to the Fed, investors await the monetary policy meeting of the Central Bank of Brazil, which ends on Wednesday. An increase of one percentage point in the Selic, to 12.75%, is a consensual bet on the markets, but there are still doubts about what the next steps will be signaled by the municipality in the statement.
“Given the very challenging current and prospective inflation scenario, further deterioration in inflation expectations (particularly towards the end of 2023), intense cost inflation pressures and the structural outlook for higher commodities, we expect the Copom to leave the door open for another lower Selic rate at the June meeting,” Goldman Sachs said in a report, without specifying the magnitude of this tightening.
In the most recent Focus weekly bulletin, the expectation was that the Selic rate would reach 13.25% by the end of this year.
Copom’s indications on the course of the Selic may have a significant impact on the dollar price, as the interest rate directly affects the attractiveness of domestic fixed income. In the period from January to March of this year, for example, the prospect of increasingly higher borrowing costs, which would tend to attract resources to the Brazilian debt market, dropped the US currency by 14.5%, its worst quarterly performance compared to the real since mid-2009.
The dollar rallied 3.8% in April, however, as the currency’s soaring internationally amid growing bets on a more aggressive Fed seeming to overshadow the high Selic.
According to Izac, there seems to be a “contrast” in market expectations regarding the next steps of the Brazilian and US central banks, which is playing in favor of the dollar: “The Fed appears to be willing to raise interest rates beyond what the market waits; our BC seems to tend to follow the market consensus”.
Even so, said Izac, “there is still a trend towards a weak dollar (against the real) this year”, which could be reinforced if the BC is forced to be more aggressive than expected in raising the Selic or if the health situation in China , where outbreaks of Covid-19 have fueled recession fears, resolve quickly.
Despite the recovery seen in April, the dollar still accumulates a fall of 9% in the year against the real, which continues to boast the position of best global performance in the period. Even so, the currency is 10% above the closing low of 2022, of 4.6075 reais, reached on April 4th.
Copyright © Thomson Reuters.