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By: StoneX Intelligence Brazil, StoneX Intelligence Brazil
Higher-than-expected readings for the US labor market 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.
Lula's criticism of the Central Bank followed, and the president's constant change of economic agendas caused exacerbated volatility and broadened investors' perception of risks, which can weaken the BRL.
European economic prospects continue to improve, attracting investment to the continent and strengthening the euro against other currencies.
Talk from Federal Reserve officials may reinforce the sense that the institution is moderating its monetary tightening from this point forward, broadening the appetite for risky assets.
Minutes of the Copom decision should provide additional information on the decision to postpone interest rate cuts to intensify warnings about fiscal risks caused by uncertainties about the new government's fiscal policy, which could strengthen the BRL.
The USDBRL ended Friday's session (03) quoted at BRL 5.146, an increase of 0.6% in the week, 1.4% in the month, but a decline of 2.5% in the year. The dollar index closed the trading session quoted at 102,8 points, a variation of +1.0% in the week, +0.8% in the month and -0.5% in the year. Monetary policy decisions by the central banks of Brazil (BC), the United States, Europe and England, higher-than-expected readings for American economic indicators, and criticism by President Luis Inácio Lula da Silva of BC independence and inflation targets marked the week.
Impact on USDBRL: undefined
This week, the focus will be on the speeches and public comments of Federal Reserve's (Fed) officials after the monetary policy decision last Wednesday (01) and surprising economic data last Friday (03). At the previous week's meeting, Fed's Federal Open Market Committee (FOMC) decided to continue reducing the pace of increases to the basic interest rate (fed funds rate), readjusting it by 0.25 p.p. to the range between 4.50% and 4.75% p.a. This was the eighth consecutive increase in US interests and constitutes the largest and fastest monetary tightening in the last four decades. At the same time, the FOMC decision drove a wave of optimism and appetite for risky assets by being perceived as a moderation of the Fed's performance in combating the country's inflationary challenge, given that in November, the readjustment had been 75 basis points and in December, 50 basis points. Thus, if the committee unanimously judged that 25 basis points are sufficient, financial traders implicitly assess that a disinflationary process is already underway and that the FOMC will not need to raise interest rates much more to recover price stabilization.
The fall in US inflation observed so far – from 9.1% accumulated over 12 months in June to 6.5% in December – took place under favorable economic conditions, namely positive GDP growth, an expanding labor market, resilient consumer demand and the relative support for risky asset values. This scenario generated expectations that a "soft landing" of the economy could occur, that is, to recover price stability without provoking an economic recession or raising the unemployment rate too much. However, several analysts warn that in periods of intense, persistent and widespread price acceleration in the past, the reduction in inflation rates only occurred after a long recessionary process.
The possibility of a "soft landing" seemed further away after the publication of the Employment Situation Report and the Services Purchasing Managers' Index (PMI) last Friday (03). The first showed that 517,000 new jobs were created in January, well above the average estimate of 185,000, and that the unemployment rate fell to 3.4%, the lowest since May 1969. In addition, the services PMI, reported by the ISM Institute, rose from 49.2 points in December to 55.2 points in January (50 points divided contraction from expansion), significantly above the average estimates, which pointed to a reading of 50.4 points. The surprisingly strong performance of the indicators has rekindled warnings that the US economy remains expanding and healthy, sustaining the level of aggregate demand – and therefore hindering the challenge of recovering price stability, which will require even higher interest rates. In this way, the focus of attention will be on listening to the diagnosis and suggestions of the authorities that make up the Fed. Federal Reserve Chairman Jerome Powell, Fed board member Michael Barr, New York Fed President John Williams, Fed board member Christopher Waller and Philadelphia Fed President Patrick Harker are scheduled to speak next week.
Impact on USDBRL: bullish
It is also worth noting the change in outlook for the European economic scenario compared to last year's last quarter, propelling the euro to ten-month highs against the dollar. First of all, energy input costs have decreased significantly after a mild winter, which allowed reduced consumption, recovering the trade balance of the European bloc. In addition, the outbreak of the war between Russia and Ukraine has led the countries of the continent to increase their fiscal expenditures, particularly to soften the momentary effects of high energy costs. In addition, the inflow of foreign capital increased after the prospects of European Economic Improvement and the narrowing of the interest differential between Europe and the United States. Finally, the process of economic reopening in China has expanded the European bloc's export projections, making it an even more attractive destination for investments.
Impact on USDBRL: bullish
Market players will also be attentive to possible statements and comments from Brazilian authorities on issues on the economic agenda, especially from President Luis Inácio Lula da Silva. After approving the budget for 2023 through a constitutional amendment and the appointment of the ministerial team, the economic team has been striving to keep the public debate focused on two topics: the definition of new fiscal rules with the Legislature and possible tax reform. President Lula, meanwhile, has been prodigal in diverting attention to a variety of topics, such as the minimum wage (which had already been defined but was not adopted), income tax brackets, a common currency proposal with Argentina, the participation of the BNDES in foreign financing, current inflation targets, the level of the basic interest rate (Selic), the independence of the Central Bank and the need to pursue fiscal stability. Lula's criticisms of monetary policy and the central bank's independence have caused uncertainty among investors about the institution's ability to pursue long-term price stability. In addition, the president's constant change of economic agendas causes exacerbated volatility in Brazilian assets, increasing market agents' fears that monetary and fiscal policies are determined by political rather than technical criteria and broadening investors' perception of risk.
Impact on USDBRL: bearish
Finally, it is worth noting the release of the minutes of the Monetary Policy Committee (Copom), which should bring some additional information regarding the decision to postpone the cuts to the basic interest rate (Selic) to ensure the disinflation process in the country and to intensify its warnings about the inflationary impacts of fiscal risks caused by uncertainties regarding the fiscal policy of the new government. In addition, analysts are waiting for the first Focus Bulletin after the committee's decision, and the release of the January National Broad Consumer Price Index (IPCA), whose average expectations point to a growth of 0.55% in the month and 5.7% in the year.
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