Outlook for the Brazilian Real and the real economy

Bullish Factors

• The FOMC minutes are anticipated to reveal that most Federal Reserve members advocate for more interest rate adjustments throughout the year, potentially contributing to strengthening the US currency.

Bearish Factors

• The possibility of a final vote on the fiscal framework in the Chamber of Deputies would enhance optimism about the Brazilian macroeconomic and fiscal framework, potentially attracting foreign investments and bolstering the Brazilian real.
• US economic data could reinforce the perception that economic activity remains stronger than expected and inflation continues to moderate, further supporting the notion that US interest rates have peaked and weakening the dollar.

Week in review

The USDBRL concluded the week higher, finishing Friday's session (August 11) at BRL 4.905, with a weekly gain of 2.5%, a monthly gain of 3.7%, but an annual decline of 7.1%. Meanwhile, the dollar index closed Friday's session at 102.8 points, showing a weekly variation of +0.9%, a monthly increase of +1.1%, and a year-to-date decrease of -0.5%. The foreign exchange market reacted to the release of the minutes from the Monetary Policy Committee (Copom) of the Central Bank's decision, inflation data publications from both the United States and Brazil, and the credit rating downgrade of American banks by Moody's credit rating agency.

USDBRL and Dollar Index (points)

Source: StoneX cmdtyView. Design: StoneX

Most important event: FOMC minutes

Expected Impact on USDBRL: Bullish

Investor focus this week is expected to center around the minutes of the Federal Open Market Committee's (FOMC) monetary policy decision by the Federal Reserve (Fed). The document will likely indicate broad support among its participants for the rate hike on July 26. However, some uncertainty about the future interest rate trajectory may also be signaled. In public statements following the decision, most Central Bank officials signaled their expectation for more interest rate adjustments throughout the year. Nevertheless, some members suggested that the tightening cycle could conclude if inflation in the country continues to moderate in the coming months. Consequently, the minutes might already highlight some divergence among FOMC members and reinforce the significance of economic data in their upcoming decisions. Regardless, market participants maintain their bets that US interest rates have reached their peak.

US interest rate history and most likely market future interest rate bet

Probabilities in the future interest rate market as of August 11, 2023. Source: StoneX.

Congressional Economic Agenda

Expected Impact on USDBRL: Bearish

The rapporteur of the fiscal framework (PLP 93/2023) in the Chamber of Deputies, Deputy Cláudio Cajado (PP-BA), stated last week that he sees "room" to discuss the matter this week. The text approved in the Federal Senate differed from the one approved in the Chamber, necessitating the deputies only to consider the project's amendments. In other words, they would assess the modifications made by the senators, either accepting the suggestions or reverting to the initially approved text in the Lower House.

Political analysts attribute the delay in considering the text to the multiple postponements of the ministerial reform in Luiz Inácio Lula da Silva's government, which sought to accommodate more space for the “center-right” parties. Nonetheless, a report from Folha de São Paulo newspaper states that changes could occur this week, which could aid the project's approval. In the Federal Senate, the Committee on Economic Affairs (CAE) will commence discussions on the Constitutional Amendment Proposal for tax reform (PEC 45/2019) on Tuesday, August 15. The Chamber approved this proposal in July. According to the Senate President, Senator Rodrigo Pacheco (PSD-MG), the expectation is to vote on the project within two months.

US Economic Data

Expected Impact on USDBRL: Bearish

Consumer demand is projected to remain elevated in July, marking the fourth consecutive month of growth, reinforcing the recent notion of a "soft landing" for the US economy. While economic activity is experiencing a mild slowdown, retail sales have shown remarkable resilience, sustaining growth in the country. On the other hand, industrial production has been performing quite poorly, though the July data is expected to show a slight positive upturn.

Key Indicators

Sources: Central Bank of Brazil; B3; IBGE; Fipe; FGV; MDIC; IPEA and StoneX cmdtyView.

Our Brazil team provides regular weekly coverage of the Brazilian economy and the outlook for the Real, accessible by clicking the link in the banner above.

Analysis by: Leonel Oliveira Mattos (leonel.mattos@stonex.com), Alan Lima (alan.lima@stonex.com), and Vitor Andrioli (vitor.andrioli@stonex.com).

Financial editor: Paul Walton (paul.walton@stonex.com).