FX Weekly Overview: The week's main events
- Bearish factors
- October's IPCA-15 acceleration should keep inflation expectations high in Brazil, reinforcing investor bets for a tighter cycle of interest rate hikes (Selic), attracting foreign capital, and strengthening the real.
- Bullish factors
- Worsening perception of Brazilian fiscal risks results in higher risk premiums demanded by investors, which could hinder foreign capital inflows and weaken the real.
- The reduced bets on Federal Reserve rate cuts are expected to sustain the recent trend of strengthening the US dollar.
The week in review
The American currency strengthened for the third consecutive week, driven by the above-expected growth in US retail sales in September and the anticipation of the impact of a possible Donald Trump victory on US interest rates. The real's losses were deepened by concerns about the management of Brazilian fiscal policy and disappointment over the apparent lack of urgency from Chinese authorities to implement significant economic stimulus.
The USDBRL ended Friday's session (18) higher, quoted at R$ 5.7004, a weekly increase of 1.5%, 4.6% monthly, and 17.5% annually. The dollar index closed Friday’s session at 103.5 points, up +0.6% on the week, +2.7% for the month, and +2.1% for the year.
USDBRL and Dollar Index (points)
Source: StoneX cmdtyView. Prepared by: StoneX.
KEY EVENT: Inflation in Brazil
Expected impact on USDBRL: bearish
This week’s agenda is light for both the US and Brazil. In Brazil, the highlight is the release of October’s IPCA-15 (Consumer Price Index) and its effects on inflation and interest rate expectations. The index is expected to accelerate by around 0.3% compared to September, driven by food price increases and higher electricity costs – the electricity tariff was at red level 1 in the second half of September and red level 2 in the first half of October. This projection would keep the 12-month accumulated IPCA-15 close to the upper tolerance limit for the inflation target of 4.5% (the latest projection from the Central Bank points to a 36% chance of the IPCA exceeding the upper limit this year), fueling concerns that price stabilization in Brazil is losing momentum. On the other hand, a mild increase is expected for services prices and the IPCA-15 core, which excludes volatile components like food and energy, which are more sensitive to monetary policy and have been the recent focus of the Central Bank of Brazil. If these projections are confirmed, it should consolidate bets for a tighter cycle of interest rate hikes (Selic) by the Central Bank, potentially increasing yields on domestic bonds and attracting foreign capital, strengthening the real.
12-month cumulative IPCA according to selected groupings (%)
Source: Central Bank of Brazil. Design: StoneX.
Expectations for US Interest Rates
Expected impact on USDBRL: bullish
In the United States, the week will bring only minor data releases, such as September’s durable goods orders, October’s consumer confidence index, and weekly unemployment claims. Investor optimism regarding quick interest rate cuts by the Federal Reserve (Fed) has substantially diminished this week, due to stronger-than-expected economic indicators and uncertainty surrounding the outcome of the US presidential election on November 5, with the race still tight and unpredictable. Last week, traders adopted a cautious stance after recent polls showed a slight increase in Donald Trump’s voting intentions, who advocates a drastic increase in US import tariffs, with a 60% rate on China and 10% on other global economies. Analysts indicate that the plan could lead to an inflationary impact, which might limit the Fed’s ability to lower interest rates to neutralize the impact. As a result, investors are expected to maintain gradual rate cut expectations, suggesting that the loss of profitability on dollar-denominated bonds will be slower than previously anticipated, favoring the strengthening of the US dollar.
Bets for the Federal Reserve’s November 7 interest rate decision
Source: CME FedWatch Tool. Prepared by: StoneX. Futures market probabilities for interest rates as of October 18, 2024
Fiscal concerns in Brazil
Expected impact on USDBRL: bullish
Last week, investor distrust in Brazil’s fiscal consolidation process remained high, despite federal government promises of a spending reduction package after the second round of municipal elections. This resulted in higher risk premiums and negatively impacted Brazilian assets such as the exchange rate and interest rate futures contracts (DI). This week, financial market agents are expected to continue monitoring statements from authorities regarding public accounts, waiting for more details on possible adjustments to federal spending.
INDICATORS
Sources: Central Bank of Brazil; B3; IBGE; Fipe; FGV; MDIC; IPEA, and StoneX cmdtyView.
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