/i.s3.glbimg.com/v1/AUTH_37554604729d4b2f9f3eb9ad8a691345/internal_photos/bs/2022/A/O/8K4LpASb6bZ2qgWBM5ww/dolar-scott-eells-bloomberg.png)
In view of the strong appreciation shown by the real against the dollar in the last few days, the market consensus has increasingly migrated to more appreciated exchange rates at the end of the year. If at the end of March, when the exchange rate was already at R$4.70 to the dollar, economists were still projecting R$5.25, now the number of analysts who see a chance for the rate to end the year below the R$5 threshold has been growing.
The shock that raised the prices of commodities helps to explain about 65% of the real’s appreciation this year, while high interest rates account for the other 35%, said Guilherme Loureiro, the chief economist at Trafalgar Investimentos. “And these are things that are here to stay. The commodities scenario is more stretched than our previous estimates and so is the interest rate scenario, since we are likely to have a very high Selic [Brazil’s benchmark interest rate] at least until the end of the first quarter of next year,” he said.
In Trafalgar’s view, the situation now looks different from the one seen at the beginning of the exchange rate appreciation process. On Wednesday, the rate closed the trading session at R$4.6194 to the dollar, close to the long-term fair value, which, according to the asset manager’s calculations, is between R$4.50 and R$4.60.
In a survey with 74 financial and consulting firms published by Valor last week, the midpoint of the estimates for the exchange rate at the end of the year was R$5 to the dollar. BTG Pactual (R$4.80), Itaú Asset Management (R$4.80) and Western Asset (R$4.90) are some of the firms that already see the exchange rate below the psychological level of R$5.
“The exchange rate keeps surprising,” said Daniel Tatsumi, a currency manager at ACE Capital. He notes that commodity prices continue to rise and the interest-rate differential remains high – factors that support the real right now. “We don’t think that, after appreciating 20% [against the dollar], the real will rise more 20%, but the direction remains the same.”
For Mr. Tatsumi, the exchange rate may start to become a little more “stationary” after the expressive appreciation of the real this year. “That foreign flow that was coming in has diminished a lot and the position of the local investor is at a very favorable level for the real, which we didn’t used to see in the recent past. We think that the exchange rate continues to improve, but the great appreciation is behind us,” he said.
One risk mentioned by ACE’s manager for the scenario projected for the exchange rate is the possibility of the U.S. Federal Reserve put in place a more aggressive monetary tightening. “If the U.S. raises interest rates with growth and without risk-off, it could be a risk for the real, and the dollar could strengthen again. We already see this in relation to currencies of countries with low interest rates,” Mr. Tatsumi said, referring in particular to the yen.
However, he stressed that the appreciation of the real, although surprising, is well justified. “We are far from saying that there was an exaggeration. Everything was moving in the direction of a more appreciated real,” he said. Regarding the short term, however, he notes that seasonal adjustments may somewhat weaken the real, remembering that in May and June the trade flow is expected to begin to decrease and there may be an outflow of dividends. Mr. Tatsumi notes that a relevant part of the flow comes from abroad, which matches with a seasonally negative period in the coming months.
Looking further ahead, Santander expects, in its baseline scenario, the exchange rate at R$5 to the dollar at the end of this year. Before, the bank expected that the exchange rate would end the year at R$5.4 to the dollar.
In a scenario review released last week, Santander’s economists pointed out that they expect some weakening of the real against the dollar below current levels throughout the second half of the year, “in the wake of the faster normalization of monetary policy in advanced economies and of some volatility generated by the debate about the direction of economic policy after 2023.”
Nevertheless, the bank’s economists say they understand that the rise in commodity prices and a likely structural change in the allocation of funds dedicated to emerging markets, caused by the conflict between Russia and Ukraine, in addition to the still significant interest differential, “is likely to result in a more appreciated exchange rate than we had imagined.” Santander believes that interest rates in the U.S. could reach 3% by the end of this year and 3.5% in 2023, while the projections for the Selic point the benchmark rate at 13.25% this year and at 10% in 2023.
In the view of Alfredo Menezes, founding partner of Armor Capital, the behavior of the exchange rate will depend on how the scenario will look until the end of the year, the terms of trade and the dynamics of monetary policy in the U.S. “If the Fed is more austere than the market is expecting, commodities could give way a bit and then the terms of trade will not be so good.”
For him, in general, the scenario is more nebulous in the second half of the year. Mr. Menezes even says he believes that the flow to variable income, which has favored the real appreciation this year, is unlikely to perpetuate until the end of 2022. In addition, he notes that the end of the year “always has a tighter flow due to remittances,” which is expected to lead the exchange rate to something between R$5.1 and R$5.2 at the end of the year. “But nothing prevents it from falling again in January 2023.”
The external scenario is one reason mentioned by Citi economists for foreseeing the exchange rate at R$5.19 to the dollar at the end of the year. “We expect a less benign global environment for emerging markets behind the expected assertive U.S. monetary tightening, which may have negative implications for emerging market currencies, as seen in 2013 during the taper tantrum [when the Fed reduced asset purchases].”
In addition, Citi professionals point out that a potential strengthening of the dollar and lower commodity prices “could exacerbate the negative impacts on the real.” They note that further strengthening of the dollar generally “is often accompanied by falling commodity prices, which can reinforce the headwinds to the real.” Citi, however, points out that this movement has not been seen so far this year.
Source: Valor International