Dollar drops heavily, closes under R$5.60 after COPOM and Fed minutes

RIO DE JANEIRO, BRAZIL – The Brazilian real was the best performer among major global currencies in the daily session, supported by the prospect of a further opening of interest differentials in favor of the real.

A measure of that yield in a year neared 11.8% per annum on Wednesday (from 2% in January), the highest since the turn of October to November 2016, when the economy’s basic interest rate (SELIC) was at 14%. The interest rate is currently at 7.75% but is expected to be raised soon.

The imbroglio in Brasilia over the vote on the Court-ordered Debt Proposed Constitutional Amendment (PEC dos Precatórios) remained on the radar, but shared the attention with news of monetary policy in Brazil and abroad.

The spot dollar closed down 1.45% at R$5.5891, its sharpest drop since October 1 (-1.47%).

The currency took a while to react to harsher Monetary Policy Committee (COPOM) minutes. JPMorgan considered that the body left the door open for an over 1.50 percentage point hike in interest rates in the upcoming meeting, depending on the outcome of fiscal negotiations and their impact on inflation.

At the day’s peak, reached in the morning, the dollar rose 0.53% to R$5.701. However, from 11 AM, sales began to emerge. Market professionals associated the movement to profit taking, after the currency’s recent climb and with various news from Brasilia – involving National Treasury auctions or related to the vote on the PEC dos Precatórios.

At 3:00 PM, Wednesday’s most awaited event occurred – the U.S. monetary policy decision, in which the Federal Reserve confirmed expectations of a stimulus cut, but ruled out any speculation of an interest rate hike in 2022, as priced into the U.S. rate curves.

It was the combination of a BCB (Brazilian Central Bank) seen as more rigid and a “dovish taper” by the Fed (reduction of stimulus, but with emphasis on points contrary to the tightening of interest rates) that pushed the dollar down in Brazil, accelerated by profit-taking after an almost 10% appreciation of the currency between early September and November 1.

“The BCB’s tougher speech in today’s COPOM minutes was seen as more realistic by the market. Thus, we are now witnessing a strong flattening of the yield curve, with a drop in long rates. I think this is an important step to boost local market confidence,” said TAG Investimentos partner and investment director Dan Kawa.