- Speeches by Fed members should reinforce the perspective of higher interest rates for a longer period in the United States.
- PCE can reinforce concern about the new acceleration of American inflation.
- Minutes of the Copom meeting may signal limitations for more intense cuts in the Selic rate or a slowdown in the expected pace of adjustments for 2024.
- Revision of the output gap calculation in the Quarterly Inflation Report (RTI in the acronym in Portuguese) may raise inflation expectations and reinforce the Central Bank's cautious tone in conducting monetary policy.
- If the PMIs for China confirm a trend of stabilization and recovery of economic activity in September, their effect can be bearish for the real/dollar pair.
The week in review
In the week that ended, the revision of agents' expectations for the future of monetary conditions in the United States was a predominant factor in defining the trend in which currency markets operated. In its decision statement on Wednesday (20), the Federal Open Market Committee (FOMC) confirmed the expected pause in its monetary tightening cycle, keeping the target for the interest rate within the range of 5.25% to 5.50%, its highest level in 22 years.
It was still pending for the agents whether the American Central Bank would leave open the possibility for a new interest rate adjustment. According to the dot plot, this possibility is not ruled out: the median of the FOMC members' projections indicates that the range for the rate could still undergo a 25 basis point adjustment by the end of 2023, being raised to between 5.50% and 5.75%. This bullish bias given to the pause in the rate hike cycle has prompted a revision of expectations and the adjustment of positions to incorporate this new scenario of higher interest rates in the American economy. As the Fed stands out from other central banks of advanced economies for its stricter stance and higher interest rates, the dollar is expected to continue strengthening against its peers.
The USDBRL ended the week quoted at BRL 4.938, practically stable compared to the previous day (+0.04%) with a weekly increase of 1.4%. The currency's appreciation was limited to the gains achieved during Wednesday (20) and Thursday (21) sessions, reflecting the Federal Reserve's announcement.
Expected impact on USDBRL: bearish
The foreign exchange and futures interest rate markets should react to the disclosures of the minutes of the Monetary Policy Committee (Copom) decision on Tuesday (26) and to the publication of the Quarterly Inflation Report (RTI) on Thursday (28).
In a unanimous decision last Wednesday, Copom cut the basic interest rate (Selic) by 50 basis points, from 13.25% p.a. to 12.75% p.a., indicating that "they foresee a reduction of the same magnitude in the next meetings and assess that this is the appropriate pace to maintain the contractionary monetary policy necessary for the disinflationary process." The language choice in the statement, which repeated the passage used in the last meeting and included concern about the fiscal scenario, with the addition of a mention of the "importance of achieving fiscal targets," conveyed a more cautious tone from the Brazilian monetary authority.
The space for more intense cuts of 75 basis points, at least for the November and December decisions, seems more limited after this week's decision. The minutes should bring more clarity to this perspective. They may even suggest the possibility of a slowdown in the expected cycle of Selic adjustments in 2024 in light of the revisions in the inflation projections presented in the decision statement. Expecting the IPCA at 5.0% by the end of 2023, at 3.5% in 2024, and 3.1% in 2025, the Copom indicated that inflation in the horizon of monetary policy action - usually the following two years - should remain above the 3.0% target. The signaling corroborates the perception of greater caution by the monetary authority. It should promote revisions in the outlook for the Selic trajectory next year, currently expected to end December at 9.00% p.a. in the Focus Bulletin. In this context, the scenarios for future inflation and the statements of the president of the Central Bank, Roberto Campos Neto, and the director of economic policy, Diogo Guillen, during the release of the Quarterly Inflation Report (RTI), gain even more relevance.
In recent comments, the director of institutional affairs, Fernanda Guardado, indicated that the monetary authority will conduct a new review of the calculation of the output gap for this edition of the RTI. Given the stronger-than-expected economic activity indicators for the second quarter, the trend is for the Central Bank to estimate a narrower output gap, that is, showing less idle capacity in the economy, which would translate into higher inflation expectations.
Other important events:
• 09/26 - IPCA-15 (August)
• 09/28 - IGP-M (September)
• 09/29 - Formation of the Ptax rate (September)
• 09/29 - Fiscal Statistics (August)
• 09/29 - Monthly PNAD (August)
Expected impact on USDBRL: bullish
Abroad, the week will feature speeches from members of the Federal Open Market Committee (FOMC), who are expected to provide further information on how the discussions on the decision to maintain the US basic interest rate last week took place, with a focus mainly on the speech by Fed President Jerome Powell, after the market closes on Thursday (28). In his speech, Powell should reinforce what was presented in the review of the FOMC's quarterly projections last week, that its members see the need for maintaining a higher interest rate for a longer period. Furthermore, if labor market indicators and inflation indices show signs of acceleration again, the discussion about a new 25 basis points increase may gain momentum in the upcoming FOMC meetings.
Among the main indicators on the agenda for the week, the Personal Consumption Expenditures Price Index (PCE) for August stands out; the main indicator used by the Fed to monitor consumer prices, which will be published by the Bureau of Labor Statistics (BLS) on Friday (29). The median of analysts' projections is that the core PCE will register its third consecutive month of moderate reading, remaining around 0.2%, with the full index advancing from 0.2% in July to 0.5% in August. In this sense, it is worth highlighting the recent increase in global oil prices and consumer fuel prices in the country. This generates some caution due to the possibility that inflation in September may show greater intensity than expected. Other indicators of the week, such as the regional performance of industries in September, the latest revision of the GDP for the 2nd quarter, sales of new homes, and industry orders in August, will help build the analysis regarding the pace of the United States economy.
Expected impact on USDBRL: bearish
Furthermore, it is worth highlighting the release of the Purchasing Managers' Index (PMI) for China's Industry, Services, and Consolidated sectors. The difficulty of the Chinese economy, especially its industry, in gaining greater traction in 2023 has been one of the main limiting factors for global economic growth prospects. Investors will observe whether the stimulus measures adopted by the government last month, such as fiscal incentives, reduction of interest rates for housing financing by the country's largest banks, and reduction of the foreign currency reserve requirement for financial institutions, will reflect in the level of activity in September. In August, production data from the industry (+4.5%) and retail sales (+4.6%) recovered more than expected annually, easing pessimism about the performance of the Asian economy. If the PMIs confirm this trend for September, its effect can be bearish for the quotes of the real/dollar pair.
