This offers glimpse of monetary authority’s view over factors that pressure rate
07/07/2022
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Policymakers have yet to unveil their view about recent currency swings — Foto: Pexels
Despite the substantial increase in the foreign exchange rate, the Brazilian Central Bank has refrained from intervening in the market by selling hard currency from its reserves since early May. Brokers told Valor that this is the right strategy, since the recent pressure is linked to global factors and a move to reprice fiscal risks.
The exchange rate has been up 14.2% since May 31, when it closed at R$4.72 to the dollar. The rate closed at R$5.39 to the dollar on Tuesday.
The rate moved without the Central Bank making any extraordinary offering of dollars in the spot or futures markets, besides the typical rollover of maturing currency swap contracts.
Some brokers believe that the Central Bank’s failure to intervene in the market offers a glimpse of the monetary authority’s view over the factors that pressure the foreign exchange rate: this view must adjust to a fiscal risk seen as higher after the federal government and Congress maneuvered to pass measures allowing vote-getting spending and the U.S. Federal Reserve raised interest rates, which impacts the global economy.
According to the official narrative, the Central Bank intervenes in the exchange rate when the market is dysfunctional – for example when there is low liquidity and problems in price formation. But, if history is any guide, the monetary authority intervenes as well to cushion currency volatility – in other words, to minimize currency swings not justified by the fundamentals.
The policymakers have yet to unveil their view about recent currency swings. However, many market players will see it as a natural move if the Central Bank acknowledges that the exchange rate will be impacted by the worsening of the fiscal risk. In addition, the real is now losing ground against the dollar as other currencies did, like the euro, which reached its weakest level in two decades.
If this really is the Central Bank’s view, there will mean a substantial change in relation to what the monetary authority had been saying since three months ago, when more upbeat perspectives for the real prevailed. In early April, when the exchange rate was testing the floor of R$4.6 to the dollar, Central Bank President Roberto Campos Neto even said that the market’s inflation expectations were not fully reflecting the stronger real.
One year ago, the Central Bank’s Monetary Policy Committee (Copom) hopes that a potentially stronger real would help it disinflate the economy. The monetary authority unveiled, in a section of the inflation report for June 2021, that it saw chances of commodity prices falling in reais. Since then, the information is seen as a positive factor in the balance of risks for inflation.
In early April, many economic analysts said that the exchange rate was unlikely to decline in the second half of the year because of the monetary tightening in the United States and the risks linked to the presidential election, to be held in October in Brazil. Later in the same month, the risks of a stronger deceleration in China weighed on the real as well.
When the real was gaining ground, some analysts questioned at some point if the Central Bank should intervene and buy dollars to slow down an appreciation that many people considered temporary. Mr. Campos Neto signed then the opposite, that the Central Bank was ready to act if monetary tightening in the United States caused dysfunctionality in the markets.
The exchange rate is now nearly 10% higher than the level of R$4.9 to the dollar used by the Copom in the inflation projection models in its last policy meeting, in June. But, as far as monetary policy is concerned, the data set, including the likely impact of recent declining prices of commodities in inflation, is what matters.
But some economic analysts have argued that the decline in commodity prices reaches inflation through other channels. One is heightened fiscal risk since a good part of the federal government’s populist fiscal measures is propped up by higher revenues brought by high prices of commodities.
*By Alex Ribeiro — São Paulo
Source: Valor International