Brazilian Real: Dollar closes down 1.26% at R$ 5.1104 (July 28)

RIO DE JANEIRO, BRAZIL – The dollar closed Wednesday with the biggest drop and at the lowest level in two weeks, suffering from afternoon selling after the United States Federal Reserve indicated that it would maintain monetary stimulus for longer.

The market had been eagerly awaiting the Fed’s signal at the conclusion of its monetary policy meeting for days. When market participants read the document and heard the statements of Fed Chairman Jerome Powell, investors began to sell dollars.

The spot dollar fell 1.26 percent to R$5.1104.

The percentage decline is the sharpest since July 14, when the dollar fell 1.87 percent. This is the lowest level since the same date when the currency closed at R$5.0855.

After the meeting, the statement was released at 3:00 PM (Brasília time). Immediately after that, the dollar jumped more than 300 points from R$5.1629 to R$5.1935, the highest level of the meeting, rising 0.35%.

But when market participants read the document and heard the statements of Fed Chairman Jerome Powell, investors began to sell dollars.

At the close of trading, the currency was at R$5.1059, down 1.34%.

At the press conference, Powell said the U.S. labor market still has “some work to do” before it’s time to withdraw economic support and also said higher inflation is still due to transitory factors.

“The Fed was pretty ‘dovish’ (pro-stimulus). It left a lot open as far as possibly cutting stimulus. And still, millions of jobs have been lost. So the Fed’s concern remains,” said Thomás Gibertoni, an analyst at Portofino Multi-Family Office.

Gibertoni believes that the more dovish Fed should be combined with a “hawkish” Copom next week, which should benefit the real.

The Brazilian currency was the second-best performer globally this session, outperformed only by the Colombian peso (+1.4%). The dollar lost ground against 29 out of 33 pairs and slipped 0.22% against a basket of peers.

“The downward movement of the dollar (in Brazil) could be more persistent. Apart from a tougher COPOM, especially if it comes to a arise of 1 percentage point of the Selic, we still have a better trade balance and also a better fiscal situation, with falling debt. That tends to attract capital to Brazil,” he explained, maintaining his forecast that the dollar will end the year at R$4.90.

Exactly a week before Copom’s interest rate decision, estimates for the Selic rate and inflation continued to rise.

BNP Paribas now sees key interest rates at 8.5% at the end of 2022, up from 7.5% this year, versus earlier expectations of 7.5% and 6.5%, respectively.

The Selic is at 4.25%, and BNP expects a 1 percentage point increase in each of the next two meetings (August and September).

“We believe that the faster pace of interest rate normalization is a good sign for the ‘carry’ competitiveness of the real in emerging markets and that the improvement in current transactions, terms of trade and trade balance has not yet fully filtered through to the currency,” Gustavo Arruda and Andre Digiacomo said in a report.

BNP continues to have an optimistic structural position in Real, financed by the euro.