07/02/2024 – 13:35
The dollar surpassed R$5.65 and reached its highest level since January 10, 2022. The currency’s surge against the real occurs amid repeated criticism from President Lula regarding the leadership of the Central Bank and uncertainties about the trajectory of public debt. Market analysts point out that, combined, the president’s statements and the fiscal risk increase concerns about the future of the exchange rate and its impact on inflation and even interest rates.
Lula even spoke of a “speculative attack” against the real and on Tuesday, the 2nd, he said he would do “something” about the rise in the dollar, but avoided detailing what measure he would take. But, after all, what explains the nervousness of the markets and what needs to be done to contain the rise?
+Dollar nears R$5.70 with renewed unease after Lula’s speech on exchange rate
Lula’s noises and speeches
Lula’s comments regarding the Central Bank and fiscal adjustment have been cited as one of the main reasons for the dollar’s rise and for the interest rate curve in Brazil to be rising sharply. In 2024, the US currency is expected to rise by close to 17%.
“The Central Bank is the one that intervenes in the exchange rate, not the Ministry of Finance,” commented Jefferson Rugik, director of Correparti Corretora. “What President Lula can do in the exchange rate is to reassure the market, saying that he will cut spending.
Finance Minister Fernando Haddad himself said on Tuesday that the best way to contain the devaluation of the real against the dollar is to improve communication about the fiscal framework and the autonomy of the Central Bank.
Economists highlight the importance of reducing communication noise among government members and greater dialogue between the Executive and the Central Bank.
“It is more than urgent that Planalto and the Central Bank sit down to talk, or we will go through the ridiculous situation of having to actually raise interest rates this year,” warns André Perfeito.
Is there a speculative attack underway?
Some experts consulted by That is agree that there is a speculative attack, even if they disagree about what it represents.
“It is not an act of “evil” on the part of the market, but rather a situation in which there is such a consensus among investors that the flow migrates in a direction that does not necessarily bear any relation to reality”, says economist André Perfeito.
Paulo Gala, chief economist at Banco Master, has a similar position. He says that the movement of investors is a natural defense strategy against an uncertain scenario. “I usually joke that the lion eats meat, there’s no point in asking him to eat lettuce.”
For Gala, although the Brazilian economy is in a good moment, with positive indicators, the market is concerned about the future trajectory of inflation and interest rates, and for this reason it has started to buy dollars and send resources abroad.
“The market has started to consider that there will not be strong fiscal credibility in the coming years,” says Gustavo Cruz, chief strategist at RB Investimentos, who disagrees with the term “speculative attack.”
Pedro Afonso Gomes, president of the Regional Economic Council of São Paulo (Corecon-SP), sees the exchange rate movement as a strategy of a small economic group. According to him, those who benefit from the rise in the dollar are exporters, especially agribusiness, and national companies that are not as impacted by imports.
“He [o presidente] is fighting this increasingly cumulative rage of this small segment of the population that imposes its will, through economic power, on others”, says the president of Corecon-SP.
Should the Central Bank intervene in exchange rates?
Part of the pressure on the exchange rate is beyond the Brazilian government’s control and is related to high interest rates in the United States. A reduction, which is not yet clear when it will occur, could ease the pressure on the real, explains Gustavo Cruz.
Paulo Gala points out that other emerging countries have suffered devaluation of their currencies. The situation in Latin America, according to the expert, is even more critical, especially in countries with governments that are not pro-market.
Among the options that the Central Bank would have to contain the rise of the dollar, Gustavo Cruz highlights line auctions or foreign exchange swap operations. The strategist, however, believes that it is also necessary to address the fiscal issue.
“Until there are interest rate cuts from the US, or more forceful announcements about spending control and how the framework works, or announcements about exchange rate intervention in Brazil, this movement will continue,” summarizes Paulo Gala.
Pedro Afonso Gomes believes that the rise in the dollar will be temporary. “What needs to be done is precisely to resist this speculation,” he says. “Unfortunately, the less intelligent will fall into the trap, and the smarter ones, as happens on the stock market, with the dollar exchange rate, will profit from this devaluation.”
Fiscal adjustment
Paulo Gala, from Banco Master, believes that there is no situation of fiscal mismanagement. However, there is a lack of a credible plan to show that the framework will remain “standing”. “It is just a matter of implementing measures to make this rule work, which are not just about increasing revenues.”
Étore Sanchez, chief economist at Ativa Investimentos, sees Fernando Haddad’s position that the government will cut spending to comply with the framework as positive. “Unfortunately, on the other hand, Lula has been reaffirming that he will not cut spending,” he says.
“President Lula’s frequent criticism of fiscal policy and the behavior of the Central Bank generate uncertainty about a possible easing of inflation next year,” agrees Gustavo Cruz. “This increases the perceived risk in the long term and contributes to the deterioration of the exchange rate.”
How far will the dollar go?
Although nervousness still remains in the markets, there is a consensus among economists that the current fundamentals of the Brazilian economy do not justify the dollar being at such a high level as it is now.
It is worth remembering that projections for the exchange rate in 2024 have increased, but that the median of the Focus report for the dollar at the end of this year is still at 5.20. A month earlier, it was at R$5.05.
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