FX Weekly Summary (Brazil Issue)

The USDBRL ended Friday’s session (19) quoted at BRL 5.169, a change of +1.9% in the week, -0.1% in the month and -7.3% in the year. Meanwhile, the dollar index closed the week quoted at 108.0 points, an increase of 2.4% for the week, 2.1% for the month and 13.0% for the year. The week was marked by strong pessimism as the risks of a global economic slowdown became more pronounced, with signs of a broad-based drop in demand in China, rising inflation in the United Kingdom and high pressure on production costs in Germany. In the United States, several Federal Reserve officials emphatically defended the need for a significant monetary tightening process to stabilize prices in the country. The prospects of an economic slowdown and higher interest rates have strengthened the dollar broadly and comprehensively against other currencies, both advanced and emerging economies.

Foreign Scenario

This week, attention should be on the Jackson Hole symposium, the stage where central bank officials speak about monetary policy and may serve as a venue for a more detailed communication of strategy. Still, analysts do not expect changes in the Federal Reserve's Chair Jerome Powell's speech, who is expected to continue to reinforce the importance and urgency of controlling the acceleration of inflation in the United States while at the same time not committing to any specific path for interest rate adjustments.

This week will also see the release of the Personal Consumption Expenditure (PCE) Price Index, the gauge most commonly used by the Federal Reserve to track prices for US consumers. After lower-than-expected readings for the Consumer Price Index (CPI) and the Producer Price Index (PPI) in July, the PCE is expected to remain near stable after growing by 1.0% in June. The University of Michigan Consumer Sentiment Index for August will also be published, another indicator frequently cited by Fed members. Complementing the analysis of the American economic situation will be the release of the August Purchasing Manager's Index (PMI) for manufacturing, services, and consolidated, signaling the strength of the productive activity. The Federal Reserve Chair Jerome Powell and the president of the Minneapolis Fed Neel Kashkari are scheduled to speak this week.

In Europe, there are still concerns about the energy crisis on the continent. The PMI previews should be analyzed in detail to see if there is any impact of the rising energy costs on business activity, as well as any indication of impacts of the low water volume on the Rhine River in Germany on logistic delays, inventory levels and new orders. Several rivers in France and Germany are well below their historical averages. Rhine River vessels must run at only 25% of their usual load to avoid the risk of running aground. This means that freight costs will rise dramatically, and logistics times for delivery will become progressively longer.
 In addition, energy costs in general, and natural gas costs in particular, continue to rise exponentially, suggesting that the European economy will face a much deeper economic recession than the United States.

Concerning the war between Russia and Ukraine, the situation at the Zaporijia nuclear power plant remains very delicate, with Ukrainian President Volodymyr Zelenskyy stating that "the world is on the brink of a nuclear disaster. This week, video footage from inside the plant shows rows of military trucks parked next to a turbine, apparently in unit 2, next to one of the nuclear reactors. Military analysts and journalists have warned about statements by Russian officials, such as the head of Moscow's radioactive, chemical, and biological forces, Igor Kirillov, who denounced potential Ukrainian attacks on the nuclear plant, which could serve as a subterfuge for Russian sabotage seeking to blame Ukraine. Before the Russians' invasion of Ukraine in late February, the Kremlin observed the same types of false warnings to justify their subsequent aggression. Also, the United Nations Secretary-General António Guterres has implored Russia not to disconnect the plant from the Ukrainian power grid and then connect it to the Russian grid since an interruption in the power supply could stop the reactor cooling system and risk a reactor meltdown. In addition, last week's big news was Ukrainian attacks on key military assets in Crimea, a territory conquered by Moscow in 2014. An air base, ammunition depots, power stations, train stations, airports, bridges and logistic lines were attacked. It is unclear how Kyiv is carrying out these attacks since they are at a much greater range than any weapon Ukraine possesses or is known to possess. There is speculation of sabotage teams behind enemy lines or drones. The Kremlin is concerned about these attacks, has put its troops on high alert, and has replaced the military chief in the region.

Finally, the geopolitical atmosphere remains tense in the strait between China and Taiwan, with the mainland country conducting daily exercises that overstep the democratic island's line of autonomy and air defense. Moreover, following US House of Representatives Speaker Nancy Pelosi's August 2 visit to Taiwan, China hardened its stance with aggressive actions to test the limits of coexistence with its neighbor.

Source: Center for Strategic and International Studies | China Power Project. Design: StoneX.

In addition to incursions on Taiwan's air dominance, something that hasn't happened since 2020, the Chinese government published an article entitled "The Taiwan Question and China's Reunification in the New Era," a sort of update of its official position on the issue and which also follows two other articles on the subject, one from 1993 and another from 2000. The drastic hardening towards Beijing in the document is clear, precisely in contrast to the previous positions. Terms like "negotiate" are absent in the new position paper, and guarantees given in the previous articles, such as that Taiwan could maintain its administrative and legislative autonomy, an independent judiciary, its political party and army, have all been removed. On the other hand, it is added that the "complete unification" of China is a "historic mission." However, it still states that it would be under the regime of "one country, two systems," just as Hong Kong had been promised - and later unfulfilled.

Domestic Scenario

This week will have a few important economic indicators. First, it is worth noting the National Broad Consumer Price Index 15 (IPCA-15) for August, in which deflation of 0.81% is expected due to fuel and electricity subsidies and the reduction in the prices charged by Petrobras for its fuels at refineries. In addition, the Central Bank will release the foreign sector statistics, which have been delayed since March. However, since the monetary authority has duly updated other indicators, there is an expectation that data for April, May and June will be published together.

Last week, once again, there was a net inflow of foreign investment into the country even in the face of an environment of greater pessimism and caution in the global economy. As a result, the balance of foreign capital flows on the B3 accumulated a positive value of BRL 13.0 billion up to August 17. However, given the strong appreciation of the American currency, these flows were not enough to contain a weakening of the Brazilian real. It seems that this trend of a positive balance of financial transactions with the rest of the world should repeat itself next week.

Balance of foreign capital flow on the B3 until August 17, 2022 (BRL billion):

Source: B3. Design: StoneX.

Finally, it is worth mentioning that the political scene is quite heated after the official start of the electoral campaigns this past Tuesday (16). Over the past week, three in-person polls showed former president Luiz Inácio Lula da Silva with more than a 10-point lead over current president Jair Bolsonaro: Ipec (12-point lead), Quaest (12 points) and Datafolha (15 points). Moreover, the elections may move the national financial markets this week with individual interviews on the country's largest television news program.