FX Weekly Summary (Brazil Issue)

The dollar traded in the interbank market rose for the third consecutive week, closing Friday’s session (06) at BRL 5.073, high by 2.6% in the week, 7.0% in the month and reducing the annual drop to 9.9%. The dollar index continued its strong rally and appreciated for the fifth week in a row, closing Friday’s session quoted at 103.7 points, a weekly variation of +0.7%, monthly of +3.9% and annual of +8.9%. The week was marked by exceptional volatility in financial markets due to fears of stagflation, with analysts betting that the Federal Reserve (Fed) will not have enough room to reduce inflation without significantly slowing down the US economy. Thus, bets that the Fed will continue to be aggressive in its monetary tightening have increased, and the risk appetite has reduced significantly.

Foreign Scenario

This week, attention should turn to public speeches by the Federal Reserve authorities after a week of extreme volatility in the financial markets caused by fears of lower economic growth and higher inflation over the next two years and statements by Chairman Jerome Powell. Despite Powell's comments that the Fed is not "actively considering" an aggressive 0.75 percentage point hike in US interest rates, almost 90% of the futures market bets last week were of a 0.75 p.p. increase at the June meeting. This "vote of no confidence" by the market is extraordinary because of the rarity of an adjustment of this magnitude (the last rise of 0.75 p.p. was in 1994) and because of the implicit challenge to the Fed's ability to maneuver.

Therefore, members of the monetary authority speaking publicly this week should focus on realigning the institution's message and trimming possible communication gaps, whether on the possibility of more aggressive interest rate hikes and tightening financial conditions, the urgency of fighting inflation, or concerns about market stability. Speakers include New York Fed President John Williams, Board of Governors member Christopher Waller, Minneapolis Fed President Neel Kashkari, Cleveland Fed President Loretta Mester, Atlanta Fed President Raphael Bostic, and San Francisco Fed President Mary Daly.
On Wednesday (11), the US Consumer Price Index (CPI) will be released, whose median expectations point to an increase of only 0.2% for the month due to the relative retreat of oil prices throughout April. Thus, the accumulated in 12 months would fall from 8.5% to 8.1%. The core prices should remain high and the pressure on the monetary authority high.

The conflict between Russia and Ukraine has advanced into its tenth week. Last week, unlike the previous weeks, saw a small territorial advance for both sides: the Russians gained territory in the region formed by Izyum, Sloviansk, Popasna and Rubijne in Donbas in eastern Ukraine; while Kiyv regained part of territories to the north, near Kharkiv. It is also worth noting sabotage and explosions in the territory of Transnistria, which have caused fears that Russia may try to extend its territorial dominance in the south as far as neighboring Moldova. A general dynamic of a war of attrition continues, with little territorial advance and a focus on containing the resupply of opposing troops. This Monday marks an important holiday in Russia, Victory Day, and Putin is likely to use the date to commemorate milestones achieved so far in the invasion of the neighboring country. There is also a risk that new threats, sanctions, or expansion of war aims will be declared on this date to energize the Russian population.

On the diplomatic front, Sweden and Finland have moved forward with their proposals to become part of the North Atlantic Treaty Organization (NATO) by September at the end of the European summer. In addition, European Union diplomats have been discussing since last Wednesday the expansion of sanctions against Russia that include a ban on Russian oil imports by all its member countries. Imports of crude oil would be vetoed for up to six months and of derivatives for up to a year, either by sea or pipeline.

Furthermore, ships flying European flags would be forbidden from transporting Russian oil anywhere. In addition to the oil bans, the proposal under discussion expands the exclusion of Russian banks with access to the SWIFT international payment system, adding three more banks – including Sberbank, the country's largest bank – to the seven already banned. To become effective, the measures need the support of all 27 member countries of the economic bloc.

Finally, it is important to note that China has been reaffirming its "zero Covid-19" policy to eliminate internal criticism of the strategy. On Friday, the Politburo of the Chinese Communist Party reported on Chinese state television that the authorities would fight any comments and actions that distort, cast doubt on, or deny the country's response to the coronavirus. The country's economic and social costs are mounting as it seeks to eliminate the highly contagious Omicron variant of the coronavirus at an extremely heavy collective sacrifice. Although restrictions have been eased in Hong Kong and, to a lesser extent, in Shanghai, the Chinese capital is moving step by step toward rigid containment, from temporary measure to temporary measure. An analysis by Nomura Bank estimated that 43 Chinese cities are in partial or total lockdown as of May 3, affecting 327 million people, including Shanghai's more than month-long isolation. Global supply chains and domestic production and demand are deeply affected by these lockdowns and threaten to reduce potential growth and exacerbate world price acceleration.

Domestic Scenario

This week, the focus will be on the Monetary Policy Committee (Copom) decision minutes. Investors will seek more details about the Central Bank's (BC) visions for executing monetary policy in 2022. In a statement released last week, Copom signaled that it "foresees as probable an extension of the cycle with an adjustment of a smaller magnitude" for the next meeting. However, during the week, the futures market bet on two more hikes, one of 0.50 p.p. in June and another of 0.25 p.p. in August. In any case, agents' expectations for inflation rates this year remain on the rise, and more information is expected about how the Central Bank will react to further increases in the National Broad Consumer Price Index (IPCA).

On Wednesday (11), the Brazilian Institute of Geography and Statistics will release the IPCA for April. The median of market estimates points to an increase of 0.94% for the month, bringing the accumulated figure for 12 months to 12.0%. Furthermore, estimates in the financial market that the indicator will close in December in double digits for the second consecutive year are increasing. During the week, the retail sales and service volume for March will also be published, important data to shape expectations for this year's Gross Domestic Product.

The price readjustment policy of Petrobras should also be the object of investors' attention. There is a growing expectation that a new adjustment in oil derivatives' prices will be announced as it is not readjusted since March 11 – 57 days ago. Amid this prospect, on Thursday night, the President of the Republic, Jair Bolsonaro, abhorred Petrobras' profits and urged the company to stop its fuel price increases under the risk of Brazil "going broke." "Petrobras, we are at war. Don't raise fuel prices anymore. Your profit is like a rape; it is absurd (...) If you continue to make profits by increasing the fuel price, you will break the country. If you have another fuel increase, you may break Brazil. And the people at Petrobras don't understand or don't want to understand, or they only have their eye on profit," argued the President. Bolsonaro's criticism came after the release of the company's quarterly results. The state-owned company reported a net profit of BRL 44.56 billion and approved the payment of BRL 48.5 billion in dividends – most of which will go to the Union. Bolsonaro made nominal appeals to the President of Petrobras, José Mauro Coelho, and the Minister of Mines and Energy, Bento Albuquerque, and mentioned the company's shareholders and board members in the criticism.

Finally, it is noteworthy that the National Congress is trying to mobilize to suspend electricity readjustments applied by the National Electric Power Agency (Aneel). This week, after the agency approved a 25% readjustment in the tariff charged by Enel Ceará, the Chamber of Deputies approved an urgent request for a legislative decree project (PDL) to suspend the approved readjustment. Furthermore, deputies are proposing the opening of a Parliamentary Inquiry Commission (CPI) to investigate the need for such a readjustment. On the other hand, while the government seeks to control the rebellion of congressmen and, in a dubious way, affirms that it is looking for other ways to reduce energy tariffs, the Forum of Associations of the Electric Sector (FASE), which brings together 27 associations, released an open letter in which it declares that any measure that seeks to suspend the effects of the readjustments foreseen in the law and the concession contracts signed with the Union is "incomprehensible and reckless."