FX Weekly Overview (Brazil Issue)

FX Weekly Overview: The week's main events
Leonel Oliveira Mattos
Alan Lima
Vitor Andrioli
USDBRL should reflect monetary policy decisions in Brazil, the USA, and Japan
Bullish factors
  • The Federal Reserve's monetary policy decision is expected to reinforce the institution's cautious stance as it carries out its interest rate-cutting cycle this year, which may foster the American interest rate differential and strengthen the USD.
  • The Bank of Japan may increase its basic interest rate for the first time in over eight years, contributing to the search for safety assets and harm currencies of emerging countries, such as the BRL.
Bearish factors
  • Changes in the Copom statement could lead to an expectation of a slower pace of cuts to the basic interest rate (SELIC), which would be beneficial for the Brazilian interest rate differential and contribute to a strengthening of the BRL.


The week in review 

The week was marked by the release of ambiguous data for the American economy, with an increase in the Consumer Price Index (CPI) and Producer Price Index (PPI) above expectations and slower growth in retail sales. The data must reinforce the Federal Reserve's cautious stance in conducting monetary policy this year.

The USDBRL ended the week higher, closing Friday's session (15) at BRL 4.999, a weekly gain of 0.3%, a monthly gain of 0.5%, and an annual gain of 3.0%. The dollar index closed Friday's session at 103.4 points, a change of +0.7% for the week, -0.7% for the month, and +2.4% for the year.

USDBRL and Dollar Index (points)
image 91887
Source: StoneX cmdtyView. Design: StoneX

THE MOST IMPORTANT EVENT: Federal Reserve monetary policy decision

Expected impact on USDBRL: bullish

There is virtually consensus that the Federal Open Market Committee (FOMC) of the Federal Reserve (Fed) will keep the interest rate unchanged in the range between 5.25% to 5.50% p.a. this Wednesday (20). Nonetheless, investors will closely monitor the release of the Summary of Economic Projections and the tone adopted in the Committee's statement and its president's press conference, Jerome Powell. After two more heated inflation readings than anticipated (January and February) and ambiguous readings for employment and activity indicators in the country, most analysts expect the Projections to show a higher inflation expectation in 2024 and a lower number of anticipated interest rate cuts by Committee members. Powell must reinforce that it is necessary to achieve higher confidence in price stabilization to start a cycle of interest rate cuts. This should stall slightly longer due to the recent, more heated data. If these expectations are confirmed, investors' risk appetite will likely decrease, and the US currency will strengthen against other currencies.


Copom's monetary policy decision

Expected impact on USDBRL: bearish

Just like the Federal Reserve decision, there is almost a consensus that the Monetary Policy Committee (COPOM) of the Central Bank of Brazil will reduce the basic interest rate (SELIC) by 0.50 p.p. this Wednesday (20), from 11.25% p.a. to 10.75% p.a. Nonetheless, some analysts argue that the space for the Central Bank to cut interest rates is shrinking amid the persistence of service inflation in Brazil and the prospects of American interest rates being maintained for longer. Therefore, there are doubts whether the Committee's statement will change its rating on inflation risks in Brazil or the international economic situation. In addition, several members of Copom commented in the previous weeks that the Committee is studying the best timing and the appropriate way to change its forward guidance, removing the plural from the phrase that "foresees a reduction of the same magnitude in the next meetings" without this being mistakenly interpreted as an indication that the pace of interest rate cuts will change. Indeed, it is quite likely that any of these changes will lead to a more conservative interpretation of the institution's next steps, potentially strengthening the BRL.


Bank of Japan's monetary policy decision

Expected impact on USDBRL: bullish

The Bank of Japan's (BoJ) monetary policy decision this Tuesday (19) may have a greater influence than usual and should be closely monitored in asset markets. Japan's last interest rate change was in February 2016, when it reduced its basic interest rate from 0.0% to -0.1% p.a., maintaining an ultra-flexible stance to encourage growth and combat the country's chronic deflation. The BoJ also maintained indirect control over the interest rates negotiated in the country's debt securities, with different tolerance margins. This week, a series of reports from specialized media claimed that the Central Bank could finally raise interest rates and abandon this yield curve control policy after being more satisfied with the growth of inflation (currently at 2.1% compared to last year) and wages in Japan. Most analysts believe that the institution will raise its interest rates at some point this year; however, it is still uncertain whether this will happen in this week's decision. As the yen is considered a safe haven in international finance, along with the dollar, the euro, and the Swiss franc, a BoJ policy change should strengthen the yen and lessen investors' appetite for risky assets, weakening the Brazilian real.


image 91891
Sources: Central Bank of Brazil; B3; IBGE; Fipe; FGV; MDIC; IPEA and StoneX cmdtyView.
Related tags: Currencies

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