Dollar trades near R$5.60 as market analyzes deflation and the US

The dollar rose but was little changed against the real on Tuesday as investors analyzed new moderate IPCA data for August and awaited inflation figures from the United States to determine the path of monetary policy at home and the Federal Reserve.

At 9:57 a.m., the spot dollar rose 0.25% to 5.5957 reais for sale. On B3, the first-maturity dollar futures contract rose 0.27% to 5.616 reais for sale.

On Monday, the dollar closed slightly lower by 0.14%, quoted at 5.5817 reais.

Global investors were cautious this morning ahead of the release of the U.S. consumer inflation report on Wednesday, the last before the Fed’s next meeting on Sept. 17-18, with the numbers likely to determine the size of the central bank’s rate cut.

Analysts polled by Reuters expect the U.S. consumer price index (CPI) to rise 0.2 percent in August, unchanged from the previous month. In 12 months, the projection is for price growth to slow to 2.6 percent from 2.9 percent in July.

In the markets’ view, it is certain that the Fed will reduce its interest rate, currently in the range of 5.25% to 5.50%, at its September meeting, since Chair Jerome Powell said last month that “the time has come” to adjust monetary policy to avoid a further cooling of the labor market.

But traders continue to mull the size of the cut as the last jobs report before the meeting, released on Friday, showed mixed data that did not help cement bets around a 25 or 50 basis point reduction.

The inflation reading can help the Fed decide, either by showing that price increases are heading safely toward the 2% target or that some level of monetary policy tightening is still needed to control them.

As such, investors remained cautious, with the dollar fluctuating little against most of its strong and emerging peers.

“Abroad, the eve of the CPI leaves markets averse to risk and a climate of caution prevails, given the possible scenario of recession or a soft landing of the North American economy”, said Marcio Riauba, manager of the Operations Desk at StoneX Banco de Câmbio.

The dollar index, which measures the performance of the greenback against a basket of six currencies, fell 0.03% to 101.620. The greenback was still little changed against the Colombian peso, the Chilean peso and the South African rand.

Deflation in Brazil

On the national scene, the market was digesting new IPCA data in August, looking for signs about the trajectory of prices in Brazil and, consequently, about the Central Bank’s future movements in the Selic rate, as financial agents project an interest rate hike at next week’s meeting.

The IBGE reported that the IPCA fell 0.02% in August on a monthly basis, slightly below the expectation of economists surveyed by Reuters of a 0.01% increase. In 12 months, the index slowed to an increase of 4.24%, from 4.50% in July.

The result, despite representing a slowdown in relation to the previous month, still showed inflation far from the center of the 3% target pursued by the BC, which has been a cause for concern for the members of the autarchy.

This distancing, combined with strong Brazilian GDP data for the second quarter, has generated expectations of an increase in the Selic rate, currently at 10.50% per year, at the next Copom meeting, on September 17 and 18.

“Given stronger-than-expected economic activity, inflation that, despite the benign data in August, should end the year close to the upper band of the target, unanchored inflation expectations and an exchange rate above 5.50 reais, the BC should start a gradual interest rate adjustment cycle at the next meeting,” said Gustavo Sung, chief economist at Suno Research.

Traders put a 98% chance that the Central Bank will raise interest rates by 25 basis points next week, with further hikes in subsequent meetings.

The projected increase in the Selic rate, together with the prospect of interest rate cuts in the US, is, in theory, positive for the real, since the Brazilian currency becomes attractive with a greater interest rate differential between the two economies.