FX Weekly Overview (Brazil Issue)

USDBRL is expected to reflect data from Brazil and the US, aiming to recalibrate interest rate expectations in both countries

The week in review

• Global financial market trading volumes were reduced due to the Thanksgiving holiday in the US.
• US data suggested a sharper-than-expected weakening of the American economy, reducing bets on Fed interest rate cuts and boosting appetite for riskier assets.

USDBRL and Dollar Index (points)

USDBRL variations | Daily: -0.32% | Weekly: -1.25% | Monthly: -0.84% | Year-to-date: -13.65% | Last 12 months: -10.95% |
Dollar Index variations | Daily: -0.12% | Weekly: -0.75% | Monthly: -0.36% | Year-to-date: -8.04% | Last 12 months: -6.31% |

Key Events: Expectations for US interest rate cuts
Expected impact on USDBRL: Bearish

Bets for the Federal Reserve’s December 10 interest rate decision

Investors are expected to closely monitor the release of private data on the US economy to recalibrate expectations for the country’s interest rate trajectory.

• Indicators will carry greater weight than usual due to delays in the publication of official statistics caused by the US government shutdown.

 

Why This Matters: The perception that US interest rates will fall at a faster pace could reduce the yield on US Treasury bonds and hinder external capital attraction, weakening the dollar globally.

 

Contradictory Scenario: In recent weeks, data on the US economy has presented a mixed picture, with some indicators signaling stronger-than-expected performance while others suggest weaker-than-anticipated results.

• This scenario seems more aligned with a gradual economic slowdown rather than a sudden and intense deterioration.

 

Conflicting Interpretations: This mixed scenario also leads to differing interpretations among Fed members regarding the economic outlook and the balance of risks facing the US.

• Recent statements from Federal Open Market Committee (FOMC) members revealed that five support pausing the rate cut cycle, citing a better balance between inflation acceleration risks and labor market weakening.
• Another four members advocate for a new rate cut in the December 10 decision, arguing that labor market weakening risks remain predominant.
• The remaining three members have not commented or left their positions unclear.
• As a result, the decision appears uncertain and difficult to predict.
• However, it’s likely the decision—whether a cut or rate maintenance—will have broad support, as Fed Chair Jerome Powell is known for fostering consensus and minimizing dissension.

 

Majority Bets: Despite contradictions in economic data, risk assessments, and FOMC member opinions, investors have solidified their bets that the Fed will cut rates in the upcoming decision.

• These bets focus on indicators pointing to greater economic weakness, downplaying data that contradicts this view.
• Investor expectations could further strengthen this week following the release of ADP’s November private employment data and ISM’s Purchasing Managers’ Index (PMI).

 

Anticipating Changes at the Fed: Additionally, media reports suggesting White House Economic Council Director Kevin Hassett is the frontrunner for the next Fed chair have fueled investor expectations for a faster rate-cut cycle.

• Powell’s term as Fed chair ends on May 15, although he may wish to remain on the Board of Governors until January 2028.
• Investors perceive Hassett as the candidate most aligned with the White House, likely advancing Donald Trump’s priorities. His nomination raises concerns about the Fed’s independence.
• Trump believes US interest rates can drop significantly without spurring inflation, leading to assumptions Hassett would push for faster and potentially imprudent rate cuts.
• However, an official nomination may take weeks. Treasury Secretary Scott Bessent indicated there’s “a good chance” Trump will announce his pick by Christmas.

 

Brazil’s Q3 GDP
Expected impact on USDBRL: Bullish

This week’s highlight in Brazil is the release of third-quarter GDP data, expected to confirm the country’s economic growth moderation trend.

Why This Matters: If confirmed, GDP moderation could increase investor bets on faster interest rate cuts by Brazil’s Central Bank, as inflation gradually stabilizes toward the target.

• This, in turn, would reduce the appeal of domestic bonds and harm foreign capital attraction, weakening the Brazilian real.

Expectations: Median projections indicate quarterly GDP growth may have declined from 0.4% in Q2 to 0.3% in Q3.

• Annualized growth over four quarters could decrease from 2.0% to 1.8% during the same period.
• While the Central Bank remains concerned about Brazil’s inflation dynamics, weaker economic activity could prompt an earlier start to Selic rate cuts.
• Currently, most forecasts anticipate the first cut will occur at the January 28 decision.

 

INDICATORS