FX Weekly Overview: The week's main events
- Bearish factors
- The Copom minutes, Quarterly Inflation Report, and IPCA-15 are expected to reinforce the expectation of an increase in the Brazilian interest rate differential and contribute to the attraction of foreign capital, strengthening the real.
- Moderate rise in August PCE should keep investor optimism high and reinforce bets on faster interest rate cuts by the Federal Reserve, favoring global appetite for risky assets and strengthening the real.
- Bullish Factors
The week in review
The week was marked by the monetary policy decisions of the Federal Reserve (Fed) and the Central Bank of Brazil (BC). In the U.S., the Fed initiated a more rapid move toward monetary easing, cutting its interest rate by 0.50 percentage points, while the BC adopted a firmer stance, raising the benchmark interest rate (Selic) by 0.25 percentage points. The prospect of widening the Brazilian interest rate differential against the US dollar strengthened the BRL.
The USDBRL ended the week lower, closing Friday's session (20) at BRL 5.5210, representing a weekly variation of -0.8%, a monthly variation of -2.0%, and a yearly increase of +13.8%. The dollar index closed Friday’s session at 100.7 points, reflecting a weekly decline of 0.4%, a monthly decline of 0.9%, and an annual decline of 0.6%.
USDBRL and Dollar Index (points)
Source: StoneX cmdtyView. Design: StoneX.
KEY EVENT: Economic data and expectations for interest rates in Brazil
Expected impact on USDBRL: bearish
This week will be packed with indicators and events important for investors to adjust their expectations regarding the trajectory of the basic interest rate (Selic). In addition to updated estimates from the Focus bulletin on Brazil's key macroeconomic variables, the Central Bank (BC) will release on Monday the minutes of last week’s Monetary Policy Committee (Copom) decision, scheduled for Tuesday (24). The future interest rate curve (DI) began to price in further hikes to the Selic after the Copom adopted a sharper tone, highlighting the need for a more restrictive monetary policy to address the asymmetric balance of inflationary risks with an upward bias, as well as projecting higher inflation through 2026. In its decision statement, the Copom stated that 'the scenario, characterized by resilient economic activity, labor market pressures, a positive output gap, rising inflation projections, and unanchored expectations, demands a more contractionary monetary policy.' As a result, the minutes are likely to reinforce this outlook for further increases in the basic interest rate by offering more detailed insight into the Central Bank members' risk assessment and how the Copom may act in its upcoming meetings.
On Wednesday (25), the National Broad Consumer Price Index 15 (IPCA-15) will be released, with expectations of an acceleration from 0.19% in August to approximately 0.25% in September, driven by the return of the red tariff flag for electricity and the easing of food deflation. Additionally, on Thursday (26), the Central Bank will publish its Quarterly Inflation Report, the institution's most detailed document for analyzing both the domestic and external macroeconomic environment, along with projections for key variables over the coming years. The publication will be followed by a press conference with Central Bank President Roberto Campos Neto and Director of Economic Policy Diogo Guillen. On Friday (27), Brazilian labor market data will be released, which is expected to continue reflecting the recent trend of strengthening.
Overall, these events and publications are expected to reinforce the perception that the balance of inflationary risks in Brazil is asymmetric, with an upward bias. Consequently, the Central Bank is likely to implement further increases in the basic interest rate in its upcoming monetary policy decisions. As a result, the expectation of additional Selic hikes, alongside anticipated interest rate cuts by the Federal Reserve, should widen the Brazilian interest rate differential, making domestic bonds more attractive and boosting the inflow of foreign capital, which would strengthen the BRL.
Brazil: History and expectation for the interest rate - Focus September 13, 2024
Source: Central Bank of Brazil. Design: StoneX. Refers to the median of the estimates pointed out by the Focus report on the specified date.
PCE and expectations for interest rates in the US
Expected impact on USDBRL: bearish
The Federal Open Market Committee's (FOMC) decision to initiate its monetary easing cycle with a 0.50 percentage point cut surprised many experts, as this move was not fully priced in. As mentioned in last week's FX Weekly Overview, a 0.25 p.p. reduction appeared more consistent with the cautious approach the Committee had adopted throughout the year and aligned with the most recent economic indicators for the U.S. economy. While the data has been mixed, it generally suggests a gradual, rather than abrupt, slowdown. This perception is further supported by the FOMC's Summary of Economic Projections, which outlines a 'soft landing' scenario for the economy. According to the median projections, the core Personal Consumption Expenditures (PCE) Price Index is expected to gradually decline from 2.6% in 2024 to 2.0% by 2026—the Fed's annual target—while the U.S. economy is projected to grow at an annual rate of 2.0% from 2024 to 2026. Meanwhile, the unemployment rate is forecast to decrease from 4.4% to 4.2% over the same period. Based on these projections, the Committee members, in their median view, anticipate a 0.50 p.p. reduction in interest rates in 2024 (two cuts over two meetings) and an additional 1.00 p.p. reduction in 2025 (four cuts over eight meetings).
As a result of the 50 basis point reduction, investors interpreted that the FOMC is more concerned with the weakening labor market than with inflationary persistence, and that the threshold for faster rate cuts may be lower than previously expected. This decision could be seen as an acknowledgment by the Federal Reserve that it had delayed the start of its monetary easing and should have begun earlier, perhaps during the July meeting. Fed Chair Jerome Powell, however, sought to temper investors' expectations for a rapid series of rate cuts, emphasizing that the U.S. central bank is neither behind in its monetary policy nor in a rush to make further reductions. He stressed that Wednesday's (18) decision should not be viewed as an indicator for future moves. Despite these comments, investors continue to bet that the Committee will implement another 0.50 p.p. cut at its November meeting.
The August PCE index reading is likely to have less influence on expectations for the trajectory of U.S. interest rates compared to previous months. Nevertheless, an increase of 0.2% is expected for both the overall indicator and its core, which excludes the more volatile components of food and energy. This mild reading aligns with the perception of a gradual stabilization of prices in the U.S.
US: History and expectation for the interest rate - September 20, 2024
Source: CME FedWatch Tool. Design: StoneX. Refers to the bet with the highest probability in the future interest rate market on the indicated date.
Average expectation for the United States federal interest rate at the end of 2024
Source: CME FedWatch Tool. Design: StoneX. Refers to the average, weighted by probabilities, of the bets in the future interest rate market on the indicated dates.
TABELA DE INDICADORES ECONÔMICOS
Sources: Central Bank of Brazil; B3; IBGE; Fipe; FGV; MDIC; IPEA and StoneX cmdtyView.
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