Brazil: the dollar rises against the real with an eye on the tightening of the Central Bank and the fiscal framework

The foreign exchange market operates aligned with the dollar appreciation abroad, and the Treasuries returns on Wednesday morning (19).

The spot dollar is trading again above R$5.00.

Investors again seek protection in the US currency before expecting further tightening interest rates in the US, the eurozone, and the UK.

The chances of a new hike in the basic interest rate by the Bank of England (ECB) of 25 basis points is almost consensual among investors (97%) after the British CPI rose 10.1% in March, from 10.4% in February, above the analysts’ forecast (9.8%).

As expected, inflation in the UK has been more persistent than in the eurozone, where the annual CPI slowed to 6.9% in March.

Still, speeches by ECB and Fed leaders have maintained a hawkish tone.

In Brazil, investors focus on the passage of the fiscal framework proposal in the House, delivered on Tuesday by the government, and for which financial analysts’ expectations are for spending expansion beyond what was anticipated when the rule was presented to the market.

The chief economist at XP Investimentos, Caio Megale, estimates that real spending growth in 2024 will end up being around 2.1%, rather than what was expected – just under 1%, with the model the government used to make the monetary correction of the spending limit – and revenue is uncertain.

The chief economist at Warren Rena, Felipe Salto, estimates a 2.3% increase in federal spending in real terms – above inflation – next year but considers the new fiscal rule well-calibrated and with controls in place.

Federal Congressman Pedro Paulo (PSD-RJ), the author of a proposal for an alternative framework, disapproved of the number of 13 items that will remain outside the spending limit imposed by the framework, such as extraordinary credits, capitalization of state-owned companies, spending by higher education institutions, and constitutional transfers.

According to operators, Brazilian industrial production fell 0.2% in February against January, as expected, and is in the background.

Compared to February 2022, production fell 2.2%.

In this comparison, without adjustments, estimates ranged from a retreat of 3.3% to a high of 2.8%, with a negative median of 2.0%.

Earlier, the second prelim of the IGP-M for April dropped 0.66%, down from a high of 0.11% in March.

At 9:35 am on Wednesday, the spot dollar was up 0.82% at R$ 5.0171, reducing the accumulated drop against the Real in April to 1.11% and in the year to 5.07%.

The May dollar gained 0.53% to R$ 5.0225.

With information from Estadão