Dollar closes below R$ 4.65 with expectations of higher Selic and commodities By Estadão Content

© Reuters. Dollar closes below R$4.65 with expectations of higher Selic and commodities

The opened the week with a firm decline in the domestic currency market, despite the predominant sign of a rise in the US currency abroad against both strong and emerging currencies. According to traders, the real would have benefited this Monday from the inflow of resources from exporters, amid the rise in metallic and agricultural commodities, and from the dismantling of defensive exchange positions in the futures market, given the expectation that the Central Bank will have to prolong the monetary tightening beyond the Copom meeting in May, in which a 1 percentage point increase in the price to 12.75% is already agreed.

To the expressive reading of March (1.62%) ten days ago was added this Monday the advance of 2.48% of the IGP-10 of April, above the median of Broadcast Projections (+2.23%). The president of the Central Bank, Roberto Campos Neto, suggested last week the possibility of extending the cycle of raising the basic rate, saying that “there was a surprise in the last IPCA”. In participation this Monday afternoon in an event on digital currencies promoted by the International Monetary Fund (IMF), Campos Neto did not speak about monetary policy.

On the trading desks, the assessment is that an even higher Selic rate maintains a very attractive interest rate differential even if the (Fed, the US central bank) accelerates the pace of interest rate hikes in the US in May, with an increase in the base rate by 50 basis points. The result is a still very favorable environment for carry trade operations.

Apart from a momentary rise in the morning, when it touched R$ 4.70, when it registered a maximum at R$ 4.7088 (+0.27%), the dollar worked lower throughout the day. The minimum, at R$4.6472, came in the last hour of trading. At the end of the day, the currency was trading at R$4.6482, down 1.02%, which leads to an accumulated devaluation in April to 2.37%.

Abroad, the index – which measures the performance of the dollar against a basket of six strong currencies – operated higher throughout the day, above 100,000 points. In relation to the real pairs, the dollar rose against the and the , but showed a slight decrease against the . The one for June, a benchmark for Petrobras (SA:), closed at US$ 113.16 a barrel, up 1.17%.

The real’s fall could have been even greater had it not been for the lower external appetite for the stock market. Data from B3 (SA:) that foreign investors withdrew BRL 1.754 billion in April (until the 13th). In the year, however, foreign capital still shows a net inflow of R$ 63.573 billion. With the strike at the Central Bank, there is no data available on the exchange rate in April, but market professionals speak of a slowdown in the pace of entry, after an exuberant first quarter.

“The came above expectations and it burst. This makes room for our Central Bank to be more aggressive and take it to more than 13%. Even with the rise in interest rates in the US, we will be very attractive for interest rate arbitrage” , says Ricardo Gomes da Silva, director of Correparti brokerage. “This expectation of higher interest rates led to a strong dismantling of positions in the futures market. In addition, the exporter is closing exchange rates and also selling.”

Gomes da Silva notes that Brazil benefits both from being an exporter of commodities, whose prices were boosted by the war in Ukraine, and from having a tradition of dealing with inflationary processes and maintaining a high real interest rate. These factors currently have a greater weight in shaping the exchange rate than concerns about public accounts and the presidential election.

Economist Cristiane Quartaroli, from Banco Ourinvest, also attributes the stronger appreciation of the real on Monday, while other emerging currencies walk aside or lose ground, to the expectation of a more expressive increase in the Selic rate, in the wake of the IPCA of March and of the IGP-10 of April. “This expectation that the Central Bank stretch the tightening cycle has contributed to the improvement of the dollar around here”, says Quartaroli. “However, the fiscal picture remains on the radar, with the readjustment of servers. The market is on alert with the possibility of new increases until the elections that end up harming public accounts. This can generate pressure on the dollar.”

Federal public servants are pressing for a readjustment greater than the 5% being studied by the government and claiming career restructuring. The Special Secretary for the Treasury and Budget of the Ministry of Economy, Esteves Colnago, said this Monday that a 5% readjustment would already require a “considerable fiscal effort” in a country that does not have a “primary surplus”.

If the 5% increase is made official, the cost in 2023 would be BRL 12.6 billion, said the secretary. This year, the estimate is for an impact of R$ 6.3 billion in the second half of the year. And there’s more. The Political Broadcast (Grupo Estado’s real-time news system) reported that measures already approved in Congress or in an advanced stage of discussion could generate a fiscal bomb of around R$25.5 billion this year, according to the economist’s calculations. Marcos Mendes, researcher at Insper.

Abroad, investors received data from the Chinese economy, which is suffering amid lockdowns to contain the advance of covid-19. Chinese GDP rose 4.8% in the first quarter (year-on-year), higher than expected (4.6%). The official target for this year, however, is a 5.5% expansion. Retail sales in China fell by 3.5%, more than expected (-2.0%). Expectations are growing that the Chinese government may launch a new round of monetary stimulus to sustain economic activity.