Dollar soars 9% in 2 months – how high can it go?

RIO DE JANEIRO, BRAZIL – The dollar has increased 9% in almost two months, and is today (19) near R$ 5.40 in early trading, far from the R$4.50 to R$5.00 range projected in mid-year by some asset managers and analysts as the fair value for the exchange rate. It is also far from the R$5.10 projection in the Central Bank’s latest Focus report.

According to Galapagos Capital manager Valter Unterberger Filho, many factors have changed over the past few months, from the global strengthening of the dollar amid expectations of withdrawal of stimuli by the Federal Reserve, to domestic issues. In addition, the rise in the number of Covid-19 cases has again influenced the market.

“Looking at Israel, for instance, the number of Covid-19 cases has been rising and so have deaths. As a result, the market is starting to question how effective the vaccines are and what is the minimum number of people that need to be vaccinated for herd immunity. All this uncertainty has directly impacted the price of commodities and, consequently, the dollar,” the manager said.

The fiscal situation in Brazil is a concern, given the deferrals of the vote on the tax reform and uncertainties about the approval of the Constitutional Amendment Proposal (PEC) that allows the federal government to pay its judicial debts in installments, rather than all at once,  which would create cash and make room for the new Bolsa Família (Family Grant).

“The market is doubtful if the country’s indebtedness, which had improved at the start of the year due to GDP growth (and contributed to bringing the dollar below R$5.00), will be sustainable,” Unterberger Filho said. “A lot has changed since mid-year. The dollar grew stronger worldwide, but domestic issues helped enhance this trend.”

Although he believes that the currency has risen significantly over the past few months, he said that there are still many upside risks in the scenario. Among them, the anticipation of the start of a reduction in monetary stimulus in the United States.

“I believe that the market is expecting the Fed to start reducing purchases in December. So, if it happens as expected, it would probably have a marginal impact on the exchange rate. But if this discussion is anticipated (by an improvement in employment data and activity in the country) or should there be a greater withdrawal of stimulus than the estimates suggest, this would undoubtedly have a greater impact, with risks of further increases in the dollar,” he commented.