By: StoneX Intelligence Brazil, StoneX Intelligence Brazil
Minutes of the FOMC decision and higher-than-expected readings for US economic indicators could reinforce fears that inflation will remain elevated longer in the country and the Federal Reserve will need to maintain its monetary tightening for longer, strengthening the US currency.
Talk of Federal Reserve officials in defense of maintaining a tight monetary tightening to regain price stability tends to reduce appetite for risky assets and strengthen the US currency.
Lula's subsequent criticism of the Central Bank causes exacerbated volatility and broadens investors' perception of risks, potentially weakening the BRL.
Positive foreign exchange flows, resulting from the high foreign appetite for Brazilian assets and generation and surplus trade balances, strengthen BRL.
The USDBRL ended Friday's session (17) at BRL 5.163, a variation of -1.1% in the week, +1.7% in the month and -2.2% in the year. The dollar index closed the session at 103.8 points, an increase of 0.3% in the week, 1.8% in the month and 0.5% in the year. The week was marked by a temporary truce in the attacks by the President of the Republic, Luis Inácio Lula da Silva, on the President of the Central Bank of Brazil (BC), Roberto Campos Neto, the level of the basic interest rate (Selic) and the current inflation targets, as well as by the higher than estimated readings for the January Consumer Price Index (CPI) and Producer Price Index (PPI) in the United States.
Impact on USDBRL: bullish
This week, attention should be on the publication of the minutes of the February 01 decision of the Federal Open Market Committee (FOMC), in which the committee decided to reduce the pace of interest rate hikes from 0,50 p.p. to 0,25 p.p. After this decision, a sequence of economic indicators presented a more vigorous reading than anticipated, such as job creation, level of activity in services, retail sales and, especially, producer and consumer prices, all referring to January. Thus, the document will be thoroughly analyzed in its assessment of the US economic conditions underpinning the easing of monetary tightening and how the FOMC members visualized possible interest rate strategies in the country for the coming months.
Most analysts diagnose that the risk factors are greater for a scenario of persistent and resistant inflation, which lasts for a long time and requires a considerable economic slowdown to restore prices. Moreover, these risks have been exacerbated by the positive reaction of investors to the reduction in the pace of interest rate hikes by the Fed, which has resulted in an expansion of liquidity and financial conditions. Thus, most bets on the futures markets began to reflect a new peak for interest rates in the US, in a range between 5.25% and 5.50% p.a.
This week's economic indicators are expected to follow this trend of robust readings, in line with an interpretation that the Fed must maintain a more aggressive interest rate strategy to contain inflationary pressures. It is worth highlighting the second preview of the Gross Domestic Product (GDP) of the fourth quarter, whose median estimates point to a slight increase compared to the first preview, going from 2.9% to 3.2%, and the Personal Consumption Expenditures (PCE) Price Index for January, whose median estimates point to a growth of 0.3% in the month and an accumulated high of 4.3% in 12 months.
Impact on USDBRL: bullish
Last week seemed to indicate an apparent truce between the President of the Republic, Luis Inácio Lula da Silva, and the President of the central bank (BC), with little criticism of the autarchy coming from parliamentarians and in a very small volume. However, in an interview broadcast on Thursday night, Lula adopted a contradictory speech, alternating conciliatory phrases with new attacks. On the one hand, the executive leader said that "it is not up to the president of the Republic to fight with the president of the Central Bank" and that "he has no problem" in talking with the President of the BC, Roberto Campos Neto. At the same time, Lula recalled that the objective of the institution is not only to control inflation but also to promote employment and economic growth in the country, that the basic interest rate (Selic) at 13.75% p.a. makes it impossible to achieve these objectives and declared that "we will have to change" the autonomy of the Central bank if it did not demonstrate its "usefulness" and was not "positive" for the economy. The oscillation between criticism and threats to the monetary policy of the central bank and others of short truce keeps investors insecure and doubtful that the executive will not try to intervene politically in the management of monetary instruments and amplifies volatility and instability on Brazilian asset prices, with reflections on the exchange rate.
Impact on USDBRL: bullish
Last week, due to the heated economic indicators from January, Federal Reserve officials adopted a more cautious tone to describe the American economic outlook. They argued that despite the significant monetary tightening carried out so far, there is still much to be done to bring prices back to the target set by the monetary authority. In retrospect, both Cleveland Fed President Loretta Mester and St. Louis Fed President James Bullard have said that a 0.50 percentage point increase in the latest decision would have been more appropriate, and both recommend that the Federal Reserve try to reach the ceiling as soon as possible and then sustain that rate for several months. New York Fed President John Williams and Fed Board of Governors member Philip Jefferson are scheduled to speak this week.
Impact on USDBRL: bearish
Several analysts note that the exchange rate movement recorded by the Central Bank began the year with high positive balances, both in the commercial and financial accounts. The accumulated trade surplus from January to February 10, 2023 (eight working days in February) is USD 3.828 billion, against USD 0.383 billion in the same period last year (using the first eight working days of February for comparison). The financial surplus in 2023 is USD 3.993 billion, compared to USD 0.108 billion in the same period in 2022. The high foreign appetite for Brazilian assets has contributed to containing the weakening of the real at a time of greater perception of fiscal and political risks reported by domestic investors that favor volatility in asset prices.
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