Brazilian Real: Dollar drops steadily after Powell’s speech

RIO DE JANEIRO, BRAZIL – Comments prepared to be read by the chairman of the Federal Reserve, Jerome Powell, in testimony to the U.S. Congress took support from the dollar on Wednesday, making the American currency weaken against virtually all other currencies. In Brazil, the tone more ‘dove’ (inclined to the maintenance of stimuli) made the dollar fall back to operate below US$5.10.

Around 1:15 PM, the U.S. currency dropped 1.72%, at R$5.0860, after touching R$ 5.0673 earlier, the lowest intraday level since June 5. At the same time, it retreated 1.06% against the South African rand, 0.87% against the Mexican peso, and 0.30% against the Turkish lira.

In the statement due to be read this afternoon, Powell said that while labor market conditions have continued to improve in the U.S., “there is still a long way to go.” He further pondered that inflation is likely to remain elevated in the coming months but continues to look transitory.

“It’s harder to defend the narrative of transitory inflation, but Powell keeps hitting it. The dollar falls because the Fed is still unwilling to raise interest rates,” notes the director of WIA Investimentos, José Faria Junior.

The professional points out that, although the tougher global scenario has been one of the main factors for the worsening of the exchange rate recently, the domestic news has also contributed. At this moment, however, things seem to be calming down here, he continues.
“The market is enjoying the reforms – even the tax reform, with the new changes -, the risk of an impeachment of President Bolsonaro has fallen, vaccination continues to be very positive, the Selic rate will soon be above inflation [expectations], all contributing to the improvement of the real,” he ponders.

Contrary to this view, the IBGE released earlier that day a 0.43% drop in the May IBBC-Br in relation to April in the seasonally adjusted comparison. The data was below the median of estimates collected by Valor Data, which pointed to an increase of 1.1%.

“It is curious that the aggregate activity has shown retraction in May, even with a series of encouraging data regarding the positive performance of industry, trade, and services. We understand that the result reflects more a statistical anomaly related to how the pandemic altered the explanatory power of the deseasonalization filters than a change in trend per se,” note economists at Guide.

“For the next readings, we expect a pickup in activity, given that the confidence indexes for June showed a rise – in particular, the services PMI, which is back above 50 – and vaccination is gaining more and more traction, which puts possible shutdown movements in state and municipal economies in check.”

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