FX Weekly Summary (Brazil Issue)

The USDBRL retreated for the third week in a row, ending Friday’s session (18) at BRL 5.017, a drop of 0.7% for the week, 2.7% for the month and 10.0% for the year. The dollar index ended Friday's session at 98.2 points, a weekly variation of -0.9%, monthly of +1.6% and annual of +2.7%. The dollar traded in the interbank foreign exchange market benefited from a week of increased optimism and appetite for risk due to small advances in diplomatic negotiations between Russia and Ukraine, searching for a solution to the conflict. In Brazil, the BRL continued to appreciate against the dollar, but at a slower pace, due to a retraction in international commodity prices, without interrupting the foreign appetite for Brazilian assets related to primary products.

Foreign Scenario

Another week has passed in which financial markets in general and commodities have fluctuated with the headlines and rhetoric surrounding the war between Russia and Ukraine. This was a slightly more optimistic week due to establishing the fourth round of diplomatic negotiations between the parties, which brought more positive than negative headlines. However, the future of the military conflict remains open and without any significant progress since its inception. Moscow has not reduced the pace of attacks while negotiating, and Russian President Vladimir Putin accused Ukraine of "trying to prolong the negotiation process by bringing unrealistic new proposals to the table," while US Secretary of State Anthony Blinken said he sees "no signs" that Putin is "ready to stop" the war. This week, the United States warned of the concrete possibility of Russia launching a chemical weapons attack against the Ukrainians under a false pretext, or even nuclear weapons should its army remain bogged down for weeks. Ukrainian cities are suffering indiscriminate artillery, missile and bomb attacks, millions of inhabitants have already fled the country, and those who remain are suffering a humanitarian catastrophe. This week, the North Atlantic Treaty Organization (NATO) countries meet for a summit in Brussels to discuss the next steps amid the uncertain scenario.

Another concern that plagued the financial markets this week was the possibility of default on Russian dollar-denominated government bonds due to the economic sanctions imposed on the country, in particular the freezing of the Russian Central Bank's assets abroad and the disconnection of most banks from the SWIFT payment system. Although the Finance Ministry made the payment on Wednesday, it was only identified by European banks, holders of the debt, almost 24 hours later, highlighting the difficulty Moscow will have in honoring its foreign commitments. Despite the distancing and risk mitigation measures companies and governments took after the invasion, a Russian default could have a small contagion effect on the financial system.

Finally, after the first interest rate increase in the United States in five years, the firm tone of the communiqué and the fact that seven members of the Federal Open Market Committee (FOMC) have signaled that at least a 0.50 percentage point increase is appropriate this year, market players should follow the public speeches of the FOMC members to obtain more information about the degree of consensus within the Federal Reserve on the trajectory of monetary tightening that it will carry out throughout the year. During the week, speeches and addresses by Jerome Powell, Raphael Bostic, John Williams, Loretta Mester and Mary Daly are scheduled.

Domestic Scenario

This week, attention will be on the minutes of the Monetary Policy Committee (Copom), which decided to raise the basic interest rate (Selic) from 10.75% to 11.75% per year and signaled a new adjustment of the same magnitude for the next meeting, in May. The minutes are expected to provide more details about the decision amid deteriorating inflationary expectations and global economic activity. In this week's statement, the monetary authority said that "the conflict between Russia and Ukraine has led to a significant tightening of financial conditions and increased uncertainty surrounding the global economic scenario (...). In particular, the supply shock arising from the conflict can exacerbate inflationary pressures that have already been building up in both emerging and advanced economies. In light of this more challenging scenario, Copom "considers that, given its projections and the risk of disanchoring expectations for longer terms, it is appropriate that the monetary tightening cycle continues to advance significantly in even more contractionary territory.

This week will also see the release of the March Quarterly Inflation Report from the Central Bank of Brazil. The macroeconomic scenarios and projections on which the institution is basing its monetary policy decisions are presented. Accordingly, the document can provide important information about the final basic interest rate the Central Bank visualizes after the end of the cycle of interest rate hikes and possible subtle comments about the fiscal zeal in times of elections and its possible impacts on this year's inflation. It will also be interesting to see how the institution will work with the long-term forecasts in the face of this period of volatility and exacerbated uncertainty due to the conflict in Eastern Europe.

Finally, it is worth mentioning the desire of the President of the Republic, Jair Bolsonaro, to change the president of Petrobras, Joaquim Silva e Luna, which should remain in the news next week. Bolsonaro has spent yet another week making public barbs at the current president of the state-owned company because he was dissatisfied with the increase in fuel prices. This week, Bolsonaro admitted that he requested a one-day delay in the readjustment of fuels, which was not met. He may request the resignation of Luna e Silva since the president would be "the majority shareholder" of Petrobras (actually, it is the Brazilian State). According to the newspaper O Globo, the President of the Republic should try to repeat the strategy he used to dismiss the former president of the state-owned company, Roberto Castello Branco: not to appoint Silva e Luna to the Petrobras Board. As the CEO of the company needs, statutorily, to belong to the Council, it creates a situation that forces one of the sides to give in - either Bolsonaro backs down and appoints Luna e Silva to comply with the statute, or Luna e Silva resigns and another president who is on the list takes over the position. Bolsonaro's favorite is Rodolfo Landim, a former company executive, president of Flamengo and an ally of Bolsonaro.