Commercial Dollar Rises, Reaches R$4.32 for First Time

RIO DE JANEIRO, BRAZIL – The commercial dollar opened higher on Friday, February 7th, and reached an unprecedented high of R$4.32. Around 12:05 PM, the currency rose 0.8 percent to a record R$4.322. The tourism dollar stood at R$4.49, up 0.9 percent.

The trend reflects the combination of the interest rate cut in Brazil and the improvement of the US economy, which strengthens the dollar against the real. Yesterday morning, the creation of 225,000 job openings in the United States in January was announced, well above the estimate of economists heard by Bloomberg, who expected 165,000 new openings.

However, the dollar’s record amount is only nominal. In real terms (corrected for inflation), the American currency is still far from its 2002 peak. Considering only the IPCA (Broad National Consumer Price Index), as calculated by the IBGE (Brazilian Institute of Geography and Statistics), the R$4 peak that year is equivalent to approximately R$10.80 today. If American inflation were also taken into account, the corrected value would be around R$7.50.

While the US economy is accelerating, Brazilian inflation recorded the lowest variation for January since the Real Plan began in July 1994. According to IBGE data released on Friday, January inflation recorded a 0.21 percent increase, below market expectations.

According to Cleber Alessie Machado, a Commcor operator, the exchange rate action in this session reflects a “limited reaction” to inflation, since the cooling of prices – which may generate a reduction in the interest rate differential between Brazil and its competitors – was offset by the Central Bank’s signaling an interruption in its cycle of interest rate cuts.

On Wednesday, February 5th, the COPOM (Central Bank’s Monetary Policy Committee) reduced the SELIC to 4.25 percent per year, a new historical low. The drop in the benchmark interest rate contributes to the depreciation of the Brazilian real through the carry trade, an investment practice in which the gain is the difference between the exchange rate and the interest rate, since the investor gets money at a lower interest rate in one country, in this case the US, to apply it in Brazil, with another currency where the interest rate is higher.

With low interest rates in Brazil, this operation is no longer profitable and foreigners pull their resources in dollars from the country, which raises the price of the currency.

Abroad, the dollar has appreciated against a good portion of the main currencies, particularly emerging ones.

“It is a global movement: the dollar is rising abroad, and simultaneously there is a poor dynamic in the domestic scenario for the Brazilian real. Our interest rate differential is very poor in relation to our peers, there is no foreign inflow – indeed, there are outflows – and we don’t have investment grade”, says Machado.

Between 11:30 and 11:40 AM on Friday, the Central Bank offered up to 13,000 foreign exchange swap contracts to roll over the April 2020 maturity.

The Brazilian Stock Exchange is operating down one percent, at 113,980 points, in line with the negative foreign exchange due to concerns over the economic impact of the coronavirus.

The sharp decline in industrial production in Germany is also a factor. In December, the country’s industry dropped 3.5 percent, the largest drop in a decade. Economists forecast a slight decline of 0.2 percent. The data supports the market’s view that the German economy may go into recession.