O dollar advanced against the real this Monday, with new tensions between the government and central bank and more nods from management Luiz Inacio Lula da Silva to fiscal expansion keeping investors away from risk, amidst fears about the path of monetary tightening in the Federal Reserve.
The US currency in sight closed up by 0.57%, at 5.1749 reais on sale, the highest closing level since January 23 (5.1993).
According to Jefferson Rugik, CEO of Correparti Corretora, investors were uncomfortable with the government’s new criticism of the Central Bank, after Lula classified this Monday as a “shame” the explanation of Monetary Policy Committee (Copom) to the current interest rate level and asked the business class and society to complain about the Selic rate level.
Lula and members of his administration have repeatedly criticized the high interest rate, currently at 13.75%, and the BC’s independence. A high Selic benefits the real by making it attractive to investment strategies that profit from interest rate differentials between economies, but it tends to restrict economic activity, which plays against the government’s development agenda.
The market, on the other hand, fears a more lenient stance by the government towards inflation, with the assessment that price escalation is also an obstacle to growth in economy.
The fiscal agenda also contributed to caution in the domestic market this Monday, after two sources said on Saturday that the Lula government is considering increasing the tax exemption Income tax for workers earning up to two minimum wages this year.
A broader waiver would represent a much larger revenue waiver as the economic team looks to narrow the expected strong 2023 primary deficit and signal fiscal discipline.
The appreciation of the dollar against the real also came in line with the strengthening of the currency abroad against most of its peers, given the reduction of hopes that the US central bank could end its current cycle of monetary tightening with interest rates below 5% on the heels of Friday’s data that showed strong job openings in the country.
After the release of the US employment report, the Citi said in a report that it cut its risk exposure in the foreign exchange market Latin America.
“At this stage, the year’s dominant narrative of an imminent Fed peak is likely at risk… Dollar shorts have been a bigger consensus strategy than (US) rate returns… With the market narrative turning, existing positions are at risk,” the US bank said.
However, there is still some optimism regarding the performance of the real, after last week the dollar went below 5.00 for the first time since June last year.
“While much of this reflects the broader risk environment and increased appetite for FX carry in emerging markets in general, it also reflects the Copom’s continued tough stance,” Goldman Sachs said in a recent report on the currency’s brief tumble. North American to below 5.
“Brazil has a ‘virtuous cycle’ in which the real is likely to benefit from rising real rates (as inflation continues to fall while nominal interest rates are kept high) and where local rates are likely to benefit from a resilient real ”, added the bank in the document.
On the other hand, Goldman Sachs warned that “risks remain on the fiscal front, of course, and a significant fiscal policy misstep could still overshadow Brazil’s generally favorable macro environment”.
The private creditor improved its projections for the level of the Brazilian currency within three, six and twelve months to 4.90, 4.85 and 4.80 per dollar, respectively. Under the previous scenario, Goldman Sachs expected exchange rates of 5.20, 5.20 and 5.00 for each period.
(Updated at 5:32 PM)
Source: Moneytimes
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