The hawkish stance taken by COPOM on Wednesday strengthens the Brazilian currency, which stood out during the session; Ibovespa closes lower
09/20/2024
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The more hawkish tone adopted by the Central Bank’s Monetary Policy Committee (COPOM) triggered a significant adjustment in domestic assets during Thursday’s session. Markets have now fully embraced the likelihood of an accelerated Selic policy interest rate hike from November, leading to a surge in future interest rates and a drop in Brazil’s benchmark stock index (Ibovespa). However, the Brazilian real gained from the widening interest rate differential, driving the foreign exchange rate to its seventh consecutive decline and marking its lowest level in a month.
In the digital options market for the November COPOM meeting, the probability of a 50-basis-point rate hike reached 65% by the end of the day, compared to a 22% chance of a 25-basis-point increase and a 9% likelihood of a more aggressive 75-basis-point hike.
“The odds of a 50-bp increase at the next meeting have risen,” noted Evandro Buccini, manager at Rio Bravo Investimentos, though he expressed surprise that the real’s appreciation wasn’t as pronounced as the upward shifts in the futures yield curve throughout the day.
The exchange rate finished the session down 0.70%, at R$5.4241. Meanwhile, Brazil’s interbank benchmark rate, known as CDI, for January 2026 surged from 11.77% to 12.05%, with the curve now pricing in a Selic rate of approximately 12.5% by the end of the tightening cycle.
Market participants highlighted several key points from the COPOM statement, including a positive outlook on the output gap (the measure of economic slack), an upward revision of inflation projections over the relevant horizon, and concerns about unanchored inflation expectations—all of which could justify a more forceful start to the tightening cycle.
Contrary to the prevailing market view, Camilo Cavalcanti, partner and manager at Oby Capital, sees the COPOM’s announcement as balanced and does not signal a more aggressive pace of interest rate hikes. “We interpreted the statement as more neutral. The language seemed more like a defense of the initial interest rate adjustment rather than guidance suggesting an accelerated pace,” Mr. Cavalcanti explains. He expects more clarity when the minutes are released. Mr. Cavalcanti also noted that the Central Bank’s acknowledgment of the output gap as positive was more of a formality, aligning with market expectations.
In his assessment, the market’s reaction during the session was “exaggerated,” and he predicts the COPOM will likely maintain a more gradual pace of 25-bp Selic rate increases per meeting until January 2025, with the rate ending at 11.5%. He pointed to the fact that the projection horizon will soon include the second quarter of 2026, which may show more moderate inflation and reduce the need for aggressive hikes.
As traders await the COPOM’s minutes to refine their Selic rate forecasts, which should be released in the next week, the real strengthened, ranking among the day’s top-performing currencies due to the rising interest rate differential, which favors bets on its appreciation.
Jorge Dib, manager at Galapagos Capital, sees a positive outlook for the real if U.S. data holds no surprises. “Among Brazilian assets, what we like today is the real,” he said, revealing a long position on the Brazilian currency against the dollar. He emphasized the real’s liquidity among emerging market currencies, making it an attractive option for quick inflows and outflows.
Mr. Dib believes the U.S. yield curve has already priced in a substantial rate cut. “At some point, the market may even push up long-term interest rates in the U.S., which could slow the demand for the Brazilian currency,” he notes, though he still expects the real to appreciate in the short term. For Mr. Dib, the current environment suggests a stronger real, not just against the dollar, but also compared to other currencies like the Mexican peso.
According to Luís Garcia, CIO of SulAmérica Investimentos, the growth differential between Brazil and the U.S. is more significant for the real’s performance than the widening interest rate gap between the two countries. “Both the U.S. Federal Reserve and the Central Bank are making monetary policy decisions based primarily on the overall health of the economy, with less focus on short-term inflation changes,” he explains. “This sends a strong signal that the relative performance of the two economies is diverging.”
Mr. Garcia notes that while Brazil’s economy is delivering positive growth surprises, the U.S. economy is starting to show signs of slowing. “This growth differential is more impactful than the interest rate spread alone.”
“Previously, the interest rate differential was a factor, but now, with the added growth differential, the outlook for the real is even more favorable,” says Mr. Garcia. He sees potential for further appreciation of the Brazilian currency. Because of this combination’s promising potential, the executive believes there is room for further appreciation of the real. “Of course, we’ve gained some support from the international market, but the fiscal debate remains critical,” he adds.
The surge in future interest rates directly impacted the Ibovespa, which closed down 0.47% at 133,123 points, marking an intraday low in a session marked by volatility. “With the COPOM’s tougher stance, investors are likely repricing the entire curve, which isn’t beneficial for the stock market in the short term,” says Alexandre Póvoa, strategist at Meta Asset Management. However, he believes that rising Brazilian interest rates, backed by credibility coupled with a decline in U.S. rates, could ultimately favor the Ibovespa in the long term.
Among the blue chips, Vale’s common shares were a highlight, gaining 1.20% to R$58.23, driven by an increase in iron ore prices.
Mr. Buccini, from Rio Bravo, notes that he sees value in holding a long position in Vale, citing iron ore’s solid but volatile performance. He acknowledges that Vale’s stock has suffered due to weaker growth prospects in China but argues that the slowdown has likely reached its peak, leaving room for potential recovery in the raw material’s performance.
*Por Arthur Cagliari, Bruna Furlani, Gabriel Caldeira, Maria Fernanda Salinet — São Paulo
Source: Valor International