FX Weekly Summary (Brazil Issue)

The USDBRL ended Friday’s session (12) quoted at BRL 5.074, a retreat of 1.8% in the week, 1.9% in the month and 9.0% in the year. Meanwhile, the dollar index closed the week quoted at 105.6 points, a change of -0.9% for the week, -0.2% for the month and +10.4% for the year. The lower than expected figure for the July Consumer Price Index (CPI) and the Producer Price Index (PPI) in the United States marked the week, raising hopes that the Federal Reserve (Fed) may moderate its pace of interest rate increases. In Brazil, the release of the minutes from the Monetary Policy Committee decision consolidated the interpretation that the interest rate readjustments ended in the last meeting, boosting, by contrast, the stock market in the country.

Foreign Scenario

This week, the focus will be on the monetary policy decision of the Federal Reserve’s (Fed) Federal Open Market Committee (FOMC). The document is expected to provide more detail on the future path for the US interest rate, particularly given the volatility of interpretations that have occurred since the decision on July 27. Immediately following the decision, an ill-placed comment by Fed Chairman Jerome Powell and the release that US gross domestic product (GDP) contracted for the second consecutive quarter sparked a wave of downward bets in the US interest rate futures market. Subsequently, FOMC officials sought to realign public perception regarding the Federal Reserve's willingness to remain aggressive in its pace of interest rate hikes, and bets quietly rose.

This week, the plot was similar, as the release of both the Consumer Price Index (CPI) and the Producer Price Index (PPI) below analysts' estimates generated hope that prices may begin a downward trajectory subsequently and that the Federal Reserve, therefore, may also moderate its pace of US interest rate adjustments. And once again, presidents of the Fed's regional offices have come out publicly to reiterate the institution's firm commitment to price stabilization and recovering expectations for future interest rates. It is worth pointing out that this volatility of interpretation is a direct result of the FOMC's lack of forward guidance and that, after major changes in public perceptions, the authorities that make up the Committee seek to use interviews, talks and speeches to, precisely, provide a guide to the future. Scheduled to speak this week are Kansas City Fed President Esther George and Minneapolis Fed President Neel Kashkari.

In addition to the Federal Reserve minutes, analysts should follow the release of retail sales and industrial production data, both for July, in search of more clarity about the current economic situation in the United States. The past few weeks have been marked by conflicting information, sometimes pointing to a slowdown, such as the negative second quarter GDP, lower than expected inflation readings, and the rising trend in weekly unemployment claims, and sometimes pointing to a vigorously heated economy, such as the net balance of job creation and generally good earnings releases from publicly traded companies.
In Europe, this week's concerns are centered on the continent's energy security, which is also experiencing a severe water crisis. Temperatures are so high and the lack of rainfall so severe that the continent will most likely face logistical difficulties due to the low quantity of water in the Rhine River. The amount of traffic is already down to a third of usual, causing delays, and the waterway is so low in some places that it may soon become impossible for large cargo vessels to pass through. The alternatives would be to wait for hypothetical future rainfall, reduce the ship's load, or circle the continent – all costly. Worse, August, September and October are historically the driest months for the Rhine basin, a bad omen for Europe.

Besides the increased costs and logistical delays, about one-third of all German imports of coal, liquefied natural gas, and iron ore occurs through the Rhine River. In addition, the drought in other regions of France is affecting the cooling capacity of nuclear power plants, forcing their output to decrease by approximately 34% compared to the same period last year. Of course, added to the trade and diplomatic crisis Europe is facing with Russia, the prices of energy supplies continue to hit record highs. It seems that the continent, Germany in particular, is more dependent than ever on Russia.

Regarding the war between Russia and Ukraine, this was another week very similar to the others, that is, a war of attrition, with minimal territorial advances, the predominance of defensive positions, and a lot of artillery exchange and bombing (especially by the Russians). For weeks, analysts have been mentioning the heavy burdens the invasion would place on the Russian army and the difficulties that the Kremlin would face in replacing new soldiers and artillery, missiles and other military armaments. While these reports may be true, on the battlefront, Moscow is getting the upper hand over Kyiv, both on the eastern front (Bakhmut, especially) and on the southern front (Mykolaiv, Kherson, and Zaporijia). This week, several officials from the United Nations and the International Atomic Energy Agency accused Russia of operating artillery strikes from or near the Zaporizhia nuclear power plant, risking a counterattack with serious consequences. The Ukrainians, for their part, accused Russian troops of trying to disconnect the plant from the power grid, possibly wanting to replace the connections to the Russian energy system.

Domestic Scenario

This week will be relatively empty of indicators, with only the Central Bank's Economic Activity Index (IBC-Br) for June and the Getúlio Vargas Foundation's GDP Monitor for the same period worthy of note. Thus, it is expected that the foreign exchange market will trade more in tune with foreign events.

However, it is important to note a trend last week that could repeat this week: since the release of the minutes of the Monetary Policy Committee's decision (Copom) on Tuesday indicating that the Central Bank favors maintaining the basic interest rate (Selic) at 13.75% p.a. in the decision of September 21 (although Copom also states that it "will evaluate the need for a residual adjustment"), the strengthening of foreign inflows into Brazil has been observed, which has collaborated to the appreciation of the Brazilian real this week. The available data suggest a greater appetite for shares in the stock market (variable income) and Brazilian public debt securities (fixed income). One can observe, for example, the balance of foreign capital flows on the Bovespa. After almost exclusively negative balances up to July 15, these funds have turned mostly positive and have already accumulated BRL 5.79 billion in August (as of 08/10). The interest rates for financing public debt bonds in practically all modalities have dropped. The long-term NTN-B, which pays real interest (already compensated for the IPCA), returned to 5.91%, the same level as at the end of June. Similarly, one of the main measures of the country's risk, the spread of Brazil's 5-year Credit Default Swap contracts, returned to 244 points, also the same level as in June; that is, it demanded payment of 2.44% of the value of Brazilian public bonds each year as a CDS premium.
 

Source: Bloomberg. Design: StoneX.

Balance of foreign capital flow on the B3 as of August 10, 2022 (BRL billion):

Source: B3. Design: StoneX.

NTN-B purchase rate due on 05/15/2045 (% p.a.)

Source: Tesouro Direto. Design: StoneX.

Finally, it is worth mentioning that the political news is increasingly agitated, but so far, without major impacts on the dollar traded in the interbank market. Despite relevant news almost every day, from polls to protests in defense of democracy, the impression is that the markets have already priced in this turbulent context. However, this does not seem to be a common electoral race, and new facts can always cause disturbances in the financial markets, particularly with domestic risk aversion.