09/23/2024 – 17:53
The spot dollar closed the session on Monday, the 23rd, slightly higher, reflecting, above all, the maintenance of risk premiums in the exchange rate associated with the domestic fiscal situation. Investors are still digesting the figures from the bimonthly revenue and expenditure report released last Friday night with less restraint on spending.
At the opening of trading, the currency, which had closed on Friday up 1.78%, attempted a new rally, approaching the maximum level of R$5.60 (R$5.5979). Soon after, the currency moderated its gains, with adjustments and profit-taking. There was also a good reception to the speech by the Minister of Finance, Fernando Haddad, about the possibility of raising Brazil’s rating, which helped to reduce the losses of local assets.
Another point that may have helped ease pressure on the real was the downward shift in 2-year Treasury yields, after Federal Reserve officials emphasized that there is room for a broader process of interest rate reductions in the U.S. Chicago Fed President Austan Goolsbee said he expects “many more” cuts throughout 2025.
With a low of R$5.5279, the dollar ended the session up 0.26%, quoted at R$5.5353. Despite two consecutive sessions of appreciation, the American currency still fell 1.77% in September. So far this year, the dollar has accumulated gains of 14.05% against the real.
The bimonthly report reduced the total spending freeze, which includes blocking and contingencies, from R$15 billion to R$13.3 billion. Although some analysts believe that the government will meet this year’s primary result target using the tolerance band (0.25% of GDP), the figures were poorly received.
In the view of Gino Olivares, chief economist at Azimut Brasil Wealth Management, the projections for both revenue and expenditure contained in the report “are questionable”. He notes that revenue exceeded forecasts due to the economy’s higher-than-expected growth and questions the government’s ability to meet its targets when activity slows down.
“The government may even meet this year’s target (considering the tolerance interval), but distrust regarding the commitment to the sustainability of public accounts only increases, which is reflected in the risk premium embedded in the prices of Brazilian assets,” says Olivares.
Banco Fibra’s chief economist, Marco Maciel, notes that, despite gains in credibility on the part of the Central Bank, with the increase in the Selic rate by 0.25 percentage points last week, in a unanimous decision, the real is still suffering from the fiscal issue.
“Some credibility in monetary policy has been gained, but risk aversion continues, as shown by the Brazilian long-term interest rate, which has not fallen even with a more hawkish Central Bank,” says Maciel. “What is weighing on long-term interest rates and the exchange rate is the fiscal aspect, with the prospect of less restraint in spending and some revenue shortfall.”
Maciel states that the risk premium suggested by the long-term interest rate is compatible with an exchange rate in the range between R$5.60 and R$5.70. If the Central Bank had opted for a larger increase in the Selic rate, of 0.50 percentage points, there could have been some additional relief, leading to a less devalued exchange rate. “Despite everything, I think the long-term interest rate is even a bit exaggerated. If the government does everything right, the rates will fall a bit and we will reach an exchange rate between R$5.40 and R$5.50 by the end of the year.”
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