US inflation truce helps emerging economies like Brazil

The slowdown in prices in the United States in July is good news for emerging countries, which feel the effects of the rise in interest rates in developed countries regarding capital outflow. It is no guarantee, however, that the financial volumes leaving these economies, among them Brazil, will not grow again in the coming months.

The US consumer price index (CPI) was stable in July compared to June and contributed to the sharp drop in the dollar against the real. At the minimum of the day on Friday, the US currency reached R$5.065, with the risk appetite favoring the entry of foreign flow in Brazil amid expectations that the monetary tightening of the Federal Reserve (Fed, the US central bank) is not so intense ahead.

“The speed with which the Fed raises interest rates, the impact on the exchange rate, and ultimately the health of the US economy will matter a lot to emerging markets,” says Michelle Meyer, chief U.S. economist for the Mastercard Economics Institute.

In August, foreign investors almost doubled the funds invested in the Brazilian stock market. By the 8th of this month, R$3.3 billion had been invested, compared with a positive balance of R$1.9 billion in July, according to B3 data.

For the chief economist of the Institute of International Finance (IIF), Robin Brooks, the fear of global inflation that weighed on the emerging markets is over: “Emerging market currencies are now up strongly, with the Brazilian real leading the pack.”

In parallel with easing inflation in the US, capital outflows from emerging countries also decreased in July, supporting local assets, according to British Capital Economics. For the consultancy, however, it was only a truce. In the coming months, the risk is that more money will continue to leave emerging countries.

“Looking ahead, despite the recent pause, our view is that outflows from emerging markets will increase again in the remainder of the year,” says Capital Economics economist Shilan Shah.

According to him, the monetary tightening in developed countries will push global bond yields higher, which plays against emerging countries. Shah warns that the scenario poses a “threat” mainly to countries whose current account deficits have risen or are rising, citing Turkey and Chile.

“Emerging countries are tied to the US. When the US sneezes, many other countries tend to catch a cold as well,” warns Michelle of the Mastercard Economics Institute.

While emerging countries tend to benefit from the lull in US inflation, Europe should be more impacted, says IIF’s Brooks. Again, the euro has fallen below parity with the dollar.

“The CPI in July is the first sign that global inflation fears are abating. This will affect the eurozone much more than the US, since the eurozone is going into recession, unlike the US,” concludes the economist.

With information from Estadão