- The increase in retail sales in the US in March is expected to reinforce the perception that the Federal Reserve will keep interest rates higher for longer, contributing to the strengthening of the USD.
- Fears of a direct conflict between Iran and Israel are expected to increase global risk aversion and promote the search for safe-haven assets, benefiting the USD.
- Fear of change in the Brazilian fiscal target may increase the demand for risk premiums by investors for Brazilian assets, weakening the BRL.
- The expiry of NTN-A bonds (National Treasury Notes) should increase demand for USD in Brazil and contribute to the weakening of the BRL.
- Chinese GDP growth in the first semester within the target set by the Parliament may increase the expectations of growth and demand in the country, favoring the performance of risky assets, such as stocks, commodities, and currencies of emerging countries, like the BRL.
The week in review
The week was marked by strong global risk aversion caused by another sharp reading for US consumer inflation, which promoted a strong appreciation of the American currency against other currencies.
The USDBRL ended the week higher, closing Friday's session (12) at BRL 5.1213, a weekly gain of 1.1%, a monthly gain of 3.0%, and an annual gain of 5.6%. The dollar index closed Friday's session at 106.0 points, a change of 1.6% for the week, +1.8% for the month, and +4.9% for the year.
THE MOST IMPORTANT: retail sales and trajectory of American interest rates
Expected impact on USDBRL: bullish
This week, retail sales in America in March are expected to reinforce the interpretation that the country's economy maintains a vigorous pace of growth sustained by personal demand. The median of estimates points to an increase of 0.3% for the full index and 0.4% for the core of the indicator, a slight decrease compared to the rates in February. The data should keep the level of risk aversion high, especially after the reading of the American Consumer Price Index (CPI) in March above expectations for the third consecutive month, which lowered expectations for an interest rate cut by the Federal Reserve (Fed) in June and increased the perception that the institution should maintain a more cautious stance in conducting its monetary policy, keeping monetary tightening for longer. On the last Friday (12), investors' bets in the futures market showed only two interest rate cuts in 2024, one in July and another in December.
US: History and expectation for the interest rate - April 12, 2024
Source: CME FedWatch Tool. Design: StoneX. Refers to the bet with the highest probability in the future interest rate market on the indicated date.
Fears of conflicts in the Middle East
Expected impact on USDBRL: bullish
Last week, fears of a conflict between Israel and Iran contributed to the high global risk aversion after an Israeli airstrike against an Iranian embassy in Syria on April 1, which killed a senior military leader from the country. The Iranian authorities have promised to retaliate, and the United States has warned that an attack by the country on Israel "is still a viable threat." It is very likely that some retaliation will occur, although there are doubts about the size of the response since Iran does not want to escalate the confrontation. Still, the possibility of a confrontation between the two countries has driven up international oil prices and increased investors' search for safe-haven assets.
LDO and target for 2025
Expected impact on USDBRL: bullish
Concerns about managing the Brazilian Fiscal Policy have increased in the last few weeks amidst discussions about changing the fiscal target, a slowdown in revenue collection in March, and the anticipation of extraordinary credit by Congress. Specialized media reports indicate that the federal government's economic team is studying modifying the budget target for 2025, shifting from a primary surplus of 0.5% of GDP to a range between 0% and 0.25% for the primary surplus. The target must be defined in the Budget Guidelines Law Bill (PLDO) submission this Monday (15). The news, if confirmed, should lessen the credibility of the Executive in complying with the established fiscal framework and increase the demand for risk premiums by investors. Additionally, the loss of pace in federal revenue collection in March, the difficulty of the Administration in advancing its economic agenda, such as defining the payroll tax exemption, and the change in the fiscal framework to allow the anticipation of a R$ 15.7 billion credit, approved by the Chamber and awaiting Senate approval, show that the risks of changes in the targets by the government are considerable.
Chinese GDP
Expected impact on USDBRL: bearish
This week, data for manufacturing, investment in fixed assets, and retail sales in China in March are expected to show a slowdown compared to February yearly, which is in line with other indicators of the month. This will increase pessimism about the country's expansion capacity in 2024 and reinforce the perception that more stimulus is needed to regain the pace of 2023. Still, the first semester's Gross Domestic Product (GDP) is expected to show a 5% increase compared to last year, driven by higher demand during the early year festivities.
Expiry of NTN-A bonds
Expected impact on USDBRL: bullish
On Monday (15), the expiry of USD 3.727 billion (approximately R$18.534 billion) in 1997 NTN-A3 debt bonds is expected to increase demand for USD and put pressure on a weakening of the Brazilian real. After this expiry, the foreign exchange instruments held by the public will decrease from US$4.093 billion to US$365 million, not including just over US$100 billion in foreign exchange swaps.
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