Dollar drops for 6th consecutive week; down nearly 8% in the year

RIO DE JANEIRO, BRAZIL – The commercial dollar ran against an international risk aversion trend and fell against the Brazilian real last session, reaching a 6th consecutive week of losses amidst the perception of attractive yields on the domestic scene.

The Brazilian real had the best overall performance against the dollar in the session, and leads gains among its major peers year-to-date.

The spot dollar fell 0.52% on Friday to R$5.14 to bid, after dropping 1.08% at the day’s low of R$5.1107.

In the week, the dollar fell 1.93%. This was its 6th straight week of decline, a period in which it lost 8.7%, in the longest streak of weekly declines since a similar streak ended in May 2021.

At Friday’s closing price, the US currency was down 7.80% to date in 2022.

“We see the result of the resumption of our interest rates to a level suited to our country risk, causing a strong foreign exchange flow here,” said FB Capital foreign exchange advisory director of operations Fernando Bergallo about the strong performance of the Brazilian real in recent weeks.

“The SELIC has shot up from a historic minimum of 2% to double digits; its upward direction was clear a long time ago, but the market took a while to reflect this interest rate hike due to external issues,” he said, citing the imminence of a monetary tightening cycle in the United States.

The basic interest rate in Brazil is currently at 10.75% a year, and should rise even further over the next Central Bank monetary policy meetings, although the authority has signaled a slowdown in the magnitude of its adjustments.

Meanwhile, in the US, the Federal Reserve’s benchmark lending rates are close to 0, but should start to rise as early as March. Adjusted for inflation, which has reached a four-decade high, U.S. yields are in negative territory.

Higher real interest rates in a given country tend to attract resources from investors to fixed income, which can consequently help in the appreciation of the local currency.

In addition to the attractive SELIC for foreigners, the recent monetary policy relaxation in China – the world’s second largest economy and Brazil’s main trading partner – is a factor that may explain investors’ interest in the Brazilian real at the start of this year, since domestic activity tends to benefit from stimuli in the Asian country, said CM Capital chief economist Carla Argenta.

Frictions on the Ukrainian border, despite having triggered occasional waves of risk aversion in global markets, may also ultimately favor Brazilian assets, the economist said.

Ukraine is an important corn producer, and a potential escalation in geopolitical tensions that interrupts the European country’s production may increase the interest of international investors in the commodity’s Brazilian crops, Argenta argued. Brazil is the world’s third largest producer of the grain, behind the United States and China.

Headlines about tensions in Eastern Europe on Friday included reports of escalating accusations from the West that Russia is seeking pretexts to invade Ukraine. Against this backdrop, the dollar index was up 0.2% in the afternoon, and there was greater demand for the safety of US bonds.

While she sees a promising scenario for the Brazilian Real both domestically and abroad, Argenta said she believes the R$5 per dollar level as a possible ceiling for the Brazilian currency’s appreciation. She added that there are good chances of an increase in the market’s political apprehension when the electoral race officially begins in Brazil, which would tend to increase dollar purchases.

FB’s Bergallo also alerted that “it is likely that there will be an inflection point [in the appreciation of the real] at some point,” citing perceptions that the current equilibrium level of the dollar would be higher than the spot market price on Friday. According to FB, the equilibrium exchange rate is currently R$5.20 per dollar.