FX Weekly Overview (Brazil Issue)

FX Weekly Overview: The week's main events
Leonel Oliveira Mattos
Alan Lima
Vitor Andrioli
USDBRL must reflect inflation in Brazil and in the US, FOMC minutes, ECB decision and data from China
Bullish factors
  • The outlook for moderation in Brazil's March IPCA is expected to increase the perception that COPOM will maintain its pace of 0.50 p.p. interest rate cuts to the Selic rate beyond May, which would harm the Brazilian interest rate differential and weaken the BRL.
  • The ECB monetary policy decision should reaffirm bets on a cycle of interest rate cuts by the authority starting in June, which would falter the euro and contribute, by length, to the strengthening of the USD.
Bearish factors
  • Forecast of a slight decline in the US CPI may lessen agents' fears about American inflation and increase bets that the Fed will make three interest rate cuts in 2024, reducing the attractiveness of American bonds and weakening the USD.
  • FOMC minutes may bring more information about the Committee's more flexible stance in May and reinforce bets that the Fed will make three interest rate cuts in 2024, reducing the attractiveness of American bonds and weakening the USD.
  • Expectation of more favorable data for the Chinese economy could raise growth and demand expectations for the country, favoring the performance of risky assets, such as stocks, commodities, and currencies of emerging countries, like the BRL.


The week in review 

The week was marked by the wide fluctuation of the value of the American currency abroad, amidst a sharper reading than expected for the country's industrial activity and labor market in March and weaker than expected for the service activity. Not even the first exchange rate intervention by the Central Bank in 15 months could contain the depreciation of the BRL real.

The USDBRL ended the week higher, closing Friday's session (05) at BRL 5.065, a weekly gain of 1.0%, a monthly gain of 1.9%, and an annual gain of 4.4%. The dollar index closed Friday's session at 104.3 points, a change of 0.0% for the week, +0.2% for the month, and +3.2% for the year.

USDBRL and Dollar Index (points)
image 92772
Source: StoneX cmdtyView. Design: StoneX


Expected impact on USDBRL: bearish

After the higher readings in January and February for the core Consumer Price Index (CPI) in the US, which excludes volatile food and energy components, a slight decrease is expected in the indicator for March on Wednesday (10), around 0.3% for both the full index and its core. If confirmed, the amount should not be enough to dispel fears that inflation is becoming more persistent in the US but would keep the possibility of a first interest rate cut by the Fed in June viable. Last week, Fed President Jerome Powell raised investors' optimism about the possibility of interest rate cuts throughout 2024 by stating that the risk scenario remains largely unchanged, with "solid growth, a strong but rebalancing labor market, and inflation moving down toward 2% on a sometimes bumpy path". So, it seems that the institution authorities are hopeful that January and February were outliers, but this may change if the CPI is higher than expected for the third consecutive month.


FOMC Minutes

Expected impact on USDBRL: bearish

Also, next Wednesday (10), the Federal Reserve will release the minutes of its last monetary policy decision on March 20. The document is always released three weeks after the decisions of the Federal Open Market Committee (FOMC) and, therefore, is a bit outdated. Still, the statement, the Summary Economic Projections, and Powell's press conference surprised investors by downplaying the recent stronger economic data, stating that the broader economic outlook remains unchanged and maintaining the possibility of three interest rate cuts this year. Accordingly, the minutes can bring more details about the discussions on the economy's risk balance, that is, whether there was any concern among FOMC members about the possibility of the current monetary tightening being insufficient to bring consumer inflation back to the institution's annual target of 2% as well as about the possibility of the current monetary tightening causing an excessive slowdown in economic activity and the labor market. Most analysts generally observe that the conjuncture is more favorable for inflationary risks than recessive ones. Additionally, comments on the Fed's asset balance reduction policy (quantitative tightening) and its impacts on the liquidity of the American financial system will be closely monitored by analysts.


March IPCA

Expected impact on USDBRL: bullish

After the last Monetary Policy Committee decision's more cautious statement, investors should follow the publication of the Broad National Consumer Price Index (IPCA) for March. The median estimate for the month is a monthly increase of 0.27%, compared to 0.83% growth in February. If confirmed, the index slowdown should reduce the Central Bank's recent concerns and magnify the possibility of another 0.50 p.p. interest rate cut for the basic rate (SELIC) in the June decision.


Chinese economy data

Expected impact on USDBRL: bearish

After positive surprises with Chinese economic indicators last month, expectations for the Consumer Price Index (CPI) and the trade balance in March are more optimistic. The CPI is estimated to increase by 1.2%, and exports and imports are expected to grow by 6.0% and 2.0%, respectively. If the projections are confirmed, they can magnify foreign investors' risk appetite and strengthen the real.


ECB interest rate decision

Expected impact on USDBRL: bullish

The European Central Bank (ECB) is expected to keep the basic interest rate unchanged at 4.00% p.a., also maintaining its signaling for the interest rate trajectory in the unified currency bloc. Amidst a moderation of inflation and broad economic weakness in the economies of the bloc, the European economic authority says it is comfortable with the projections in the futures market for interest rates, which indicate that the first interest rate cut may occur in the June decision. Additionally, the economic scenario is more favorable for cuts in Europe than the US, which may lead the ECB to make more cuts than the Fed throughout 2024. Thus, the statement and the press conference can contribute to a weakening of the euro due to the prospect of a worsening interest rate differential compared to the US.


image 92773
Sources: Central Bank of Brazil; B3; IBGE; Fipe; FGV; MDIC; IPEA and StoneX cmdtyView.
Related tags: Currencies

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