Interest rates

Dollar below R$5? Brazil’s high interest rates and commodity appreciation drive the currency down 8% this year

Specialists see a chance that the exchange rate will reach around R$4.90 in the next few days; however, the upcoming election and changes in US monetary policy are expected to push prices higher through June

Yasuyoshi CHIBA / AFPThe US currency has fallen against the real for six consecutive weeks

The real again caught the eye of the international market for leading the appreciation against the dollar in 2022 among the main currencies of emerging countries and major economies. Since mid-January, the Brazilian currency has not known what it is like to lose against the North American pair. This year, the dollar has already accumulated a decline of 7.8%. Over the past year, the US currency has appreciated 7.4%. The current scenario saw the dollar close at R$5.12 last Wednesday, the 16th, the lowest price since July last year. The North American currency recovered ground in the following days and closed on Friday the 18th at R$5.14. The performance left the real above the dollar for the sixth consecutive week. The new cycle of falls goes through domestic factors, such as costs highs and the cooling of political tensions. Abroad, the appreciation of merchandise attracts investors to Brazil, one of the sector’s main markets. The good time, however, should not last beyond the first half. Analysts point to the volatility generated by the election fight as a major risk factor for the exchange rate in the coming months, added to recent global geopolitical tensions and rising interest rates in other countries.

The double-digit rise in interest rates is seen as the main driver of the dollar’s decline. At the beginning of February, the Central Bank (CB) got up for Selic at 11.75% per annum and signaled a further increase at the meeting scheduled for next month. On several occasions, the president of the monetary authority, Roberto Campos Neto, has declared that interest rates will rise as much as necessary to control expectations of inflation in 2022 and 2023, which are currently above target. The tone has analysts predicting that the end of the cycle high is not near and that the level could reach close to 13% by June. Higher interest rates increase returns on fixed income securities and make the country more attractive to foreign investors. The recent moment of truce in Brasilia also mitigates Brazilian political risk, one of the main reasons for the poor exchange rate mood last year. “Country risk has stopped getting worse, as interest rates keep rising, i.e. the country is paying more for risk that is not increasing,” says the economist in head of Banco Original, Marco Caruso.

The international scenario was also favorable to the domestic exchange rate. The extension of the commodity appreciation cycle observed last year is attracting investors’ money to countries that concentrate this market, such as Brazil, which has already received nearly R$50 billion in contributions since the start. of the year. Currently, most companies listed on B3 (the Brazilian stock exchange) are commodity-based, mainly represented by giants Petrobras and Vale. Also in the external scenario, the lethargy of the major economies to raise interest rates, despite signs of high inflation, favored the real against the dollar. The main example of this movement is the Federal Reserve (Fed), the US central bank, which is still maintaining some of the economic stimulus enacted at the start of the coronavirus pandemic. The same example was seen in Brazilian peers, such as Mexico, which raised interest rates after the Brazilian Central Bank and currently has the rate at half the Selic, despite the biggest inflation swing in two decades. .

The great diversity of influences makes the exchange rate one of the main forecasting assets. Despite this difficulty, analysts believe that the dollar should maintain its bearish trajectory in the days or weeks to come, with the potential to remain below the R$5 line. 90 for some time,” explains economist and professor at Insper, Roberto Dumas. The same view is shared by Traders Club Chief Economist Fernanda Mansano, who sees a scenario for the exchange rate to remain below the current level until early next month. “If we maintain the current scenario, in the very short term, it should remain around R$5,” she said, citing the recent risk in Eastern Europe as one of the main factors today. change rate. “If this risk increases, financial agents will put the money into less risky investments, which means withdrawing resources from emerging countries,” she explains.

Analysts are unanimous in indicating that the favorable scenario will not last until the turn of the semester. The proximity of the October elections should gradually push the dollar higher in the coming months. “The electoral pressure should bring the exchange rate to 5.50 reais at the end of the period”, projects the chief economist of Reag Investimentos, Simone Pasianotto. Political tensions should focus on fiscal risk, ie the government’s ability to maintain control over spending. The scare of the market is the federal government’s embrace of economic populism as a way to stay competitive during the election cycle. “The election will be high octane. It will be time for the candidates to show their plans, and in fact the plan is to tackle. The gringo sees this scenario and leaves,” says Dumas. Combined with the depreciation of the domestic scenario, the rise in US interest rates should already show signs of consolidation of a tougher monetary policy as of the next quarter in the country.