FX Weekly Summary (Brazil Issue)

The dollar traded on the interbank market rose for the second consecutive week, closing this Friday (29) quoted at BRL 4.944, a gain of 2.9% in the week and 3.8% in April. In the year, however, the Brazilian currency accumulates 11.3%. On the other hand, the dollar index continued its strong rally and strengthened for the fourth consecutive week, appreciating 2.0% in the week, 4.9% in the month, and 8.0% in the year. The week was marked by a surge in the dollar index, which reached highs not seen in twenty years, driven by the consolidation of expectations that the Federal Reserve should adopt a rapid and intense monetary tightening in the coming months, outperforming the central banks of other safe-haven currencies.

Foreign Scenario

This week, the focus will be on the Federal Reserve's (Fed) Federal Open Market Committee (FOMC) monetary policy decision. Analysts almost agree that the FOMC should raise interest rates by 0.50 p.p., taking them to a range between 0.75% and 1.00% per year. It would be the first half percentage point increase since May 2000, reflecting the Fed's urgency to achieve neutrality in US monetary policy later this year. After the decision, the statement and the press conference will be fundamental in gauging the level of rigor with which the authority will act in its next decisions. Although the interest market is betting on the likelihood of a 0.75 p.p. increase in the June decision, something not seen since November 1994, this move could cause shocks in the financial market and, for this reason, there is no consensus as to whether the FOMC would adopt it. It is also reasonable to assume that the Fed will formally announce the beginning of reducing the US central bank's balance sheet. According to the minutes of the last FOMC decision, its members "generally agree" that a maximum reduction of USD 95 billion per month, over three months, in its balance sheet assets "would be appropriate," divided into USD 60 billion per month in US Treasuries and USD 35 billion per month in mortgage-backed securities.

This week also sees the release of data for the labor market in the United States, namely the April Employment Situation Report, which reports the number of new jobs and the official unemployment rate, and the March vacancies and turnovers report, which indicates how many job openings were available. These reports should show that hiring continues to accelerate, with the unemployment rate remaining very low and average pay per hour worked accelerating, as in previous months.

The conflict in Eastern Europe may also affect financial markets next week after the Russians halted natural gas supplies to Poland and Bulgaria this week in response to those countries' rejection of demands to pay in rubles. Poland imports 90% of its natural gas from Russia, and Bulgaria 76%. European leaders have denounced Moscow's move as political and economic "blackmail" and insist that commercial and legal terms are observed. The Kremlin is now demanding payment in rubles to protect itself from possible sanctions in the future, while the European Union (EU) accuses Russia of disregarding the terms of existing contracts.

Press reports indicate that the EU is preparing new sanctions in retaliation against Moscow, banning the import of Russian oil, which is likely to cause new shocks to the price of this commodity and put further pressure on price indexes worldwide.

On the battlefront, the proximity of Russia's "victory day" holiday on May 9 has prompted an escalation in the tone used by the Russians. The Kremlin continues to use the threat of nuclear attack in its belligerent rhetoric. This week, Russia again carried out ballistic missile airstrikes along with Ukrainian territory, seeking to compromise Kiyv's logistical infrastructure and reduce its rearmament of troops on the battlefronts to the east. However, Ukraine's President Volodymyr Zelenskyy reported that three attacks were "suspiciously close" to three nuclear power plants in the country, which could be a threat by Moscow. Russian Foreign Minister Sergei Lavrov reinforced that "the danger [of nuclear war] is serious, real. And we should not underestimate it. There is also concern that the Russian invaders could advance toward Moldova, located in western Ukraine, to unite the Donbas region territorially, Crimea, and the breakaway region of Transnistria. 

Finally, it is important to note that China's zero Covid policy is exacerbating imbalances in global supply and production chains. An analysis by Nomura bank estimated that 46 Chinese cities are in partial or total lockdown as of April 25, affecting 343 million people, including the more than month-long lockdown in Shanghai. The city is the most populous in China, home to the largest port by container volume globally and a major industrial and financial hub. Although the port remains theoretically operational, delays are mounting due to the forced isolation of truck drivers, cargo warehouses, and port employees so that goods can barely arrive or leave the port. About one-third of all the world's container ships - about 600 of them - are stuck in or near the port of Shanghai. On Thursday, Beijing ordered the shutdown of schools and some public spaces to prevent the nation's capital from suffering another rigid lockdown just like Shanghai. In addition, almost all of its 22 million inhabitants participated in mass testing to identify and isolate only areas (districts) with the presence of the virus. China's rigid treatment of the coronavirus brings increasing costs and diminishing benefits.

Domestic Scenario

This week, in the domestic scenario, the focus will also be the Central Bank's Monetary Policy Committee (Copom) decision. Although the president of the Central Bank, Roberto Campos Neto, has mentioned in interviews that he wants this decision to be the last increase in the basic interest rate (Selic), from 11.75% per annum to 12.75% per annum, market analysts are betting that the acceleration in prices, which is still very high, persistent and disseminated, will force the monetary authority to make another adjustment in June to 13.25% per annum. In this sense, the Copom statement should help align market expectations in this regard.
Last week, the Brazilian Institute of Geography and Statistics (IBGE) announced that the IPCA-15 went from 0.95% in March to 1.73% in April. Considered a "preview" of the official inflation, this was the highest result for an April indicator since 1995. In 2022, the IPCA-15 accumulated a high of 4.31% and, in 12 months, an increase of 12.03%. As in previous months, this result was mainly influenced by the hikes in transportation (+3.43% in the month) and foodstuffs (+2.25%), although the acceleration in prices is widespread – eight of the nine subgroups presented increases. Diesel fuel rose 13.11%, gasoline 7.51%, ethanol 6.60%, and vehicular gas 2.28% in April. Besides this, the 8.09% readjustment in bottled gas was also noteworthy.

The fiscal and political risks are also intensifying in the country. On the one hand, Brazil's President Jair Bolsonaro spent the week defending his "constitutional grace" to federal deputy Daniel Silveira (PTB-RJ), who the Supreme Court had convicted for the crimes of coercion of the process and attack on the Democratic State of Law. The Executive leader also criticized the Supreme Court and the Superior Electoral Court judges. But on the other hand, the National Congress also supported Silveira and nominated him to the vice-presidency of the Constitution, Justice and Citizenship Commission of the Legislature.

The Ministry of Economy announced throughout the week an increase in the cut of the tax on industrialized products (IPI) from 25% to 35%, in addition to a new credit program (Brazil Entrepreneur Credit Program). The IPI subsidy should have an impact of BRL 15.2 billion on the 2022 Budget alone, while the Brazil Entrepreneur Credit Program should have a total cost of BRL 100 billion. Furthermore, since the end of last year, when the Administration approved two constitutional amendments releasing the full payment of the government's judicial debts and increasing the constitutional spending limit, the Executive has been engaged in approving a series of incentive measures aimed at boosting the President of the Republic's candidacy for reelection, such as the increase in the average benefit of Auxílio Brasil, the expansion of parliamentary amendments, the readjustment of civil servants and several tax benefits.

The perception of greater fiscal and political risks may increase the demand for risk premiums by foreign investors, resulting in lower inflows of foreign capital into the country and, consequently, pressure a BRL depreciation.

Finally, it is noteworthy that the Central Bank's employees decided to resume their strike movement on May 3 after the Central Bank failed to present a counterproposal to the institution's employees and stated that not even the 5% increase for all careers was "made official" by President Bolsonaro, but is still pending approval.

The strike by the monetary authority's employees has been suspended since April 19, when the employees decided to give a vote of confidence to Roberto Campos Neto, president of the Central Bank, in the search for "an even better proposal for analysts and technicians. Since then, they have been working in standard operations and carrying out daily shutdowns from 2 pm to 6 pm.