FX Weekly Overview: The week's main events
- Bullish Factors
- ECB interest rate cut this week may harm the yield of euro-denominated assets and indirectly strengthen the US dollar against other currencies.
- The Chinese trade balance may reinforce perceptions of a slowdown in domestic demand in the country and negatively impact the performance of risky assets such as commodities and currencies of primary product-exporting countries like the real.
- Bearish Factors
- A slowdown in US job growth could partially revive investor bets on Fed rate cuts and weaken the dollar.
- Brazilian GDP growth in the first quarter could attract foreign capital to the country and contribute to strengthening the real.
- The return of the Import Tax on small purchases in Brazil could slightly reduce fears about the public accounts balance in 2024 and attract foreign investments.
The week in review
During a week of holidays in Brazil and the US, trade was marked by fluctuations in expectations for Federal Reserve interest rate cuts and increased perceptions of risks to Brazil's fiscal and monetary policy management.
The USDBRL ended the week lower, closing this Friday's session (31) at BRL 5.251, a weekly increase of 1.6%, a monthly increase of 1.1%, and an annual increase of 8.2%. The dollar index closed this Friday's session at 104.6 points, with a weekly variation of -0.1%, a monthly variation of -1.5%, and an annual variation of +3.2%.
USDBRL and Dollar Index (points
Source: StoneX cmdtyView. Design: StoneX.
Most important event: US Employment
Expected impact on USDBRL: bearish
Last week was marked by fluctuations in bets on US interest rates and, consequently, on US Treasury yields, with a noticeable increase during the week following a low-demand auction of these securities, followed by a modest recovery after April's Personal Consumption Expenditures (PCE) index data matched analysts' estimates. This week may bring more fluctuations due to the release of data on US economic activity (PMIs) and the labor market.
The median estimate for the Employment Situation Report shows a slight increase in job creation from 175,000 in April to 180,000 in May. If confirmed, this data remains well below the average between December and March this year of a positive balance of 274,000 jobs and may ease concerns that the US economy is too overheated to allow for inflation stabilization. This, in turn, should increase bets on Federal Reserve rate cuts in the coming months, potentially harming the performance of dollar-denominated assets and weakening the dollar globally.
US PMI
Expected impact on USDBRL: bullish
On the other hand, stronger readings of May's preliminary Purchasing Managers' Index (PMI) measured by S&P Global last week raised estimates for the final May data, particularly the measure released by the ISM institute. Thus, the median estimate for industrial activity shows an increase from 49.2 points in April to 49.6 points in May, while the median estimate for the services sector shows an increase from 49.4 points to 50.5 points during this period. Thus, the improvement in the country's performance may reinforce investor fears that economic activity is too overheated to allow for inflation moderation, further reinforcing the prospect of higher US interest rates for a longer period and strengthening the dollar against other currencies.
Brazilian GDP
Expected impact on USDBRL: bearish
After two consecutive quarters of stagnation, Brazil's Gross Domestic Product (GDP) is expected to have expanded by 0.8% in the first quarter of this year compared to the last three months of 2023, with personal consumption and household income growth outweighing the negative effects of monetary tightening. The number should contribute to attracting foreign investments by showing greater return potential to investors, strengthening the real; however, it may not be enough given the recent loss of credibility in the country's monetary and fiscal policy management.
ECB Interest Rate Decision
Expected impact on USDBRL: bullish
For several weeks, analysts have projected that the European Central Bank (ECB) will start its rate-cutting cycle in its monetary policy decision this week, reducing its base rate from 4.00% p.a. to 3.75% p.a. due to more consistent inflation moderation and weak economic performance in the eurozone. There is more uncertainty, however, about the pace of cuts by the institution, and most investors believe that an additional reduction would only occur at the September decision. In its recent meetings, the ECB indicated it would react to the latest economic data and their effects on the Central Bank's economic projections. In any case, if the rate cut this week is confirmed, it should worsen the yield prospects of euro-denominated bonds and indirectly strengthen the dollar.
Chinese Trade Balance
Expected impact on USDBRL: bullish
In recent months, China's export numbers have shown more robust performance than the domestic demand data, driven by the chips and electric vehicle segments. The partial recovery of global industrial activity also contributes to faster export growth. Thus, the median projection for annual export variation shows an increase from +1.5% in April to +4.5% in May, while the median estimate for imports shows a decrease from +8.4% to +3.2% over the same period. If confirmed, this data could worsen investor expectations for economic growth in the country, reducing the prospects for commodity demand growth by the world's second-largest economy and harming the performance of currencies of primary product-exporting countries like the real.
Import Tax in Brazil
Expected impact on USDBRL: bearish
Scheduled for a vote this Tuesday (4) in the Federal Senate Plenary is Bill 914/2024 (Mover), which establishes financial incentives for the production of less polluting motor vehicles and, among other measures, reinstates the Import Tax at a 20% rate on international purchases up to US$50. The new tax should increase federal revenues and may contribute to meeting the federal government's budget targets, although investors are more concerned with expenditure containment than revenue growth.
INDICATORS
Sources: Central Bank of Brazil; B3; IBGE; Fipe; FGV; MDIC; IPEA and StoneX cmdtyView.
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