Will the dollar go back to R$5? Which explains the movement of the US currency, at its lowest since November

The dollar has lost significant strength against the real in recent weeks. From around 5.40 BRL in the first trading sessions of this year, the US currency is now trading around 5.10 BRL (despite the increase in this Friday’s session), contrary to some expectations of appreciation of the US currency in the in the middle of the beginning of the government of PT Luiz Inácio Lula da Silva.

To a large extent, however, the weakening of the US currency against the Brazilian one is not due to the domestic scenario but to the improvement of international factors which directly affect the strength of the real.

“At first, the risk of a recession in the United States and the expectation that the American central bank will momentarily curb the rise in interest rates favors emerging countries,” explains Diego Costa, B&T Câmbio’s head of exchange for the North and Northeast.

There has been a reversal in investor sentiment towards the US in recent weeks. Where previously the concern was inflation, with the prospect of the Federal Reserve possibly raising interest rates further, now weak economic activity is on the radar, after price increases have apparently peaked.

“The market is understanding that the US economy is in a soft landing process. The concern that interest rates would have to rise sharply there to bring down inflation is losing steam. The theory that is consolidating is that the Fed will not need to raise rates so much and that the effects of the hikes will already stabilize the economy”, explains Alex Agostini, chief economist at Austin Rating.

The interest rate in the United States is a factor affecting the Brazilian economy, as well as almost everyone else on the planet.

Since US Treasuries are considered the “world’s safest asset,” when they trade at higher rates, a flow of capital is created for these securities. This reduces the capital available for other investments, especially those that offer more risk, as in the case of emerging countries such as Brazil.

The downward movement of the US currency extends against other currencies. The DXY, the index that measures the strength of the dollar against other currencies in developed countries, stopped trading at 104 points at the beginning of the year and now trades at a level of 101 points. Looking further afield, it reached 114 points in September last year, after falling more than 10%.

“The data in the US was still very supportive. The country appears to have inflation under control and the Federal Reserve knows it cannot raise interest rates too much given that the US economy is closely tied to sectors such as the real state and durable goods”, adds Fabrizio Velloni, chief economist of Frente Corretora.

According to specialists, the perception has strengthened that the Fed will not be able to raise interest rates much, or will cause a greater recession than anticipated.

China and also dollar price news

In addition to the situation in the United States itself, China has also pulled up the strength of the real. The Asian country is the second largest economy in the world and the largest consumer of raw materials, products that stand out in the Brazilian trade balance.

“We have had record tourism in China. This demonstrates that the breaking of the restrictions imposed by the Covid-19 control is bringing results and creates the prospect that growth will be higher this year”, Velloni points out. “This has caused commodity prices to have a dramatic increase around the world, and the real has a strong correlation with these commodities.”

According to the specialist, until then the inflow of foreign capital into Brazil was largely linked to exporting companies.

The ordinary shares of Vale (VALE3), in the mining sector, accumulated an increase of more than 7% in January, those of CSN (CSNA3), of steel, of more than 26%, and those of PetroRio (PRIO3), of oil, over 18%.

First, however, the real detached itself, for political reasons, a little from the rest of the currencies of the emerging countries, all of which are very much anchored to raw materials.

“We were lagging behind other currencies and the dollar, also because there were some controversial statements made by the new government, such as the single currency, the end of the independence of the Central Bank, etc. This has made the market more tense”, comments Velloni.

The recent outlook is that the new government, from a party historically least in favor of fiscal control, is adjusting its discourse.

“Domestic investors are showing signs of realizing that there is no room for the current government to give the economy a workhorse and adopt heterodox policies so little for maneuvers that can throw the Brazilian economy off the axis,” he comments Augustine. “It is clear that Fernando Haddad [ministro da Fazenda] brings some concern for the fiscal balance, despite the Transition PEC. It has some effect.

Diego Costa, of B&T, says the US currency should continue to fluctuate in the near term.

“This week’s Focus Report maintained its expectations at BRL 5.28 for 2023, however that could change very quickly depending on the next steps in monetary policy in the US and fiscal policy here,” the specialist discusses.

For Wagner Investimentos, on the other hand, there is an upward trend for the dollar in the medium to long term.

“Despite the fact that the real lags far behind the global currency market, even if compared to Chile and Colombia, there is a scenario for buying. We have in favor of the real the reopening of China, the decline of DXY and the interest differential (although the carry has fallen from almost R$0.05 per month to less than R$0.03)”, assesses the house. “The next US data will be very relevant to understand if the Dollar Index will stop at 100 or if it will continue to fall. It’s going to affect the dynamics here.

JP Morgan, in a report released this week, says the real has fared worse than emerging South American currencies due to political noise.

“The real appreciated about 3% against the US dollar, much less than other currencies in commodity-selling countries, which are benefiting from China’s reopening. In the same period, the Chilean peso advanced by 13% and the Colombian by 9%”, explain the analysts of the American bank. “The real’s performance was impacted by tax noise, but we believe the political discourse should become more constructive in the coming months. This should allow the real to recover part of the performance of its peers and benefit from better trading conditions,” they conclude.

Luiz Felipe Bazzo, CEO of Transferbank, believes Haddad’s recent announcements are signaling a fiscal commitment, reducing so-called Brazil risk.

“This way the Brazilian Selic, currently at 13.75% per annum, is cheaper than US interest rates and attracts more foreign capital to the country,” he says.

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