Dollar broadly weaker against Brazil real after U.S. jobs data disappoint

Brazil's broker XP sees the dollar closing the year at BRL 5.30, but does not rule out chances of the currency hitting BRL 5 by then

Photo: REUTERS/Ricardo Moraes
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  • The drastic drop occurred shortly after the United States reported much lower generation of job vacancies in April;
  • Brazil real hit four-month high as global banks turn hawkish on interest rates.

Brazil‘s real surged on Friday to close at its highest in almost four months against the dollar, after U.S. jobs data for April came in well below expectations, putting a damper on hopes that a roaring economic recovery would spur higher rates and light a fire under the greenback.

The four-month high is also related to Brazilian Central Bank’s hawkish tone in its statement that accompanied a second aggressive hike in borrowing costs.

The dollar price came to operate high at the beginning of the trading session, going up to a maximum of BRL 5.2963 (+ 0.33%), but at 9:30 am it plummeted and continued to fall until it hit a minimum of BRL 5.2047 (-1 , 40%) around Friday noon.

U.S. jobs data fueled expectations that Fed won’t officially pare stimulus for a while and won’t raise rates as early as the end of next year.

“It’s clear that there are people who are not ready and able to go back into the labor force,” U.S. Treasury Secretary Janet Yellen told reporters on Friday, citing parents whose children are still learning remotely. “I don’t think the addition to unemployment compensation is really the factor that is making a difference.”

READ ALSO: Brazil real hits four-month high as global banks turn hawkish on interest rates

The result was a two-month low of the dollar index and an emerging currency index rally to an all-time high, driven by the Chinese yuan. The movements took place in line with the fall in Treasury yields, which, yet, recovered at the end of the trading session.

The settlement of the dollar abroad has extended to Brazil. The spot currency fell 0.97%, to BRL 5.2276 on sale, the lowest since Jan. 14 (BRL 5.212).

In the week (marked by the Central Bank’s signal for a more austere monetary policy) the currency fell by 3.75%, the strongest since the week ended last December 4 (-3.77%).

READ ALSO: Brazil’s cenbank raises the basic interest rate to 3.5% and signals a third increase of 0.75% for June

“The arbitrator will bring money to fixed income when the Brazilian Central Bank starts to raise interest rates more consistently. There will be a flow for debt securities, issuance of companies… This is not yet true today, but the signaling may be confirmed, ”said Carlos Eduardo Tavares, executive director of foreign exchange at the BS2 bank.

“With a 2% real interest rate, you have the acceleration of the dismantling of long positions in dollars. The downward pressure (in the dollar) should continue for a while, ”he added.

The dollar has already fallen for six consecutive weeks, the longest series of its kind since the same six weeks of decline ended on October 26, 2018.

In the current sequence of write-offs, the price accumulates a decrease of 8.94%.

For Caio Megale, chief economist at Brazil‘s broker XP, the fundamentals of the exchange rate indicate that the real may continue to appreciate in the coming months. XP is in the process of reviewing scenarios and, for now, sees the dollar closing the year at BRL 5.30, but does not rule out chances of the currency hitting BRL 5 by then.

“The dollar bias in the short term is low. (…) People care about Covid’s CPI (Brazil‘s investigation committee in the Senate to investigate a possible omission by Brazil‘s government in fighting the COVID-19 pandemic). Without anything catastrophic, Covid’s CPI tends to take the focus away from the Ministry of Economy, relieves the economic environment, takes away the focus from the fiscal, ”said Megale.

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