Dollar hits 7-month lows with flow to Brazil amid Russian crisis

RIO DE JANEIRO, BRAZIL – The dollar began the week dropping to its lowest level in almost 7 months against the real, with the Brazilian currency showing the best overall performance on Monday, benefiting from the continuous rotation of flows favoring higher interest rate markets – such as Brazil – in a seemingly unfazed reaction to the geopolitical crisis involving Russia.

The spot dollar closed the day down 0.70% at R$5.1059. This is the lowest value since the R$5.0795 on July 29 last year.

Throughout the session, the dollar ranged from R$5.156 (+0.28%) to R$5.0753 (-1.29%). The currency has dropped 3.77% in February, deepening the accumulated decline in 2022 to 8.39%. As a result, in addition to the better performance in the session, the Brazilian Real is the currency gaining the most against the greenback in the month and in the year.

Commodities appreciated again on the day, including iron ore, one of the main products on Brazil’s export roster, which helps raise the terms of trade (ratio between export and import prices), improving the exchange rate fundamentals.

The session was mixed among emerging currency pairs of the real, and the Brazilian currency once again stood out, with bargain-hunting flows to assets seen with potential for appreciation, on a holiday in the US.

According to Goldman Sachs calculations, despite the recent appreciation, the Brazilian real remains among the currencies with the biggest discount, of almost 30% based on the bank’s equilibrium exchange rate model, mainly considering the embedded real interest rate for one year, not far from 10%.

This combination places the Brazilian currency in an even more heavily shielded position amid the geopolitical crisis that is knocking out the Russian ruble and “European satellite currencies.” According to Goldman Sachs, the models show that the Brazilian real would be the fourth most vulnerable currency to the devaluation of the ruble, but this year the exchange rate is diverging from history and serving as a hedge against the Eurasian country’s market turbulence.

Not by chance, the Brazilian real continues to attract bullish bets. Speculators trading on the Chicago Mercantile Exchange (CME) bought net new real contracts in the week ending last Tuesday, pushing bets in favor of the Brazilian currency to a 5-year high.

However, this trend may be close to the limit, cautioned Citi strategists. “Seasonality is less favorable for adding ‘long’ positions in reais in the second half of February,” the professionals said in a note, although maintaining the bets already in place.