Real closes quarter with 3rd worst global performance and market shows lack of conviction for improvement

Real closes quarter with 3rd worst global performance and market shows lack of conviction for improvement
Real closes quarter with 3rd worst global performance and market shows lack of conviction for improvement

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By José de Castro

SAO PAULO (Reuters) – The dollar suffered the biggest percentage drop in the last March session in three weeks, driven by the dismantling of positions amid the correction of the foreign currency and adjustments linked to the formation of the end-of-month Ptax, still having repercussions. speeches by Congressional leaders about combating the pandemic.

But the exchange rate remains surrounded by uncertainty factors that may extend into the new quarter. The market remains uncomfortable with the negative signal emitted by the budget imbroglio and, despite waiting for the acceleration of the local vaccination, it now has to deal with the emergence of more variants of the coronavirus in a country that today is, by far, the epicenter of the pandemic in the world.

The spot dollar closed this Wednesday in a fall of 2.23%, to 5.6304 reais in the sale, after oscillating between 5.778 reais (+ 0.33%) and 5.6224 reais (-2.37 %%).

The quotation had the highest daily low percentage since the last day 10 (-2.39%).

In the month, the dollar rose 0.50%, after reaching an accumulation of 3.39% up to March 9, when the currency closed close to 5.80 reais.

March was marked by increased doubts about Brazil’s fiscal situation and uncertainties related to the Central Bank’s stance in the foreign exchange market, even after the BC raised the Selic rate at a stronger pace to contain inflation, at a time when the high prices in the world pushes interest rates in developed countries upward, putting pressure on emerging market currencies.

In 2021, the dollar jumps 8.45%, leaving the real in the third worst position among 33 pairs of the dollar – better only than Argentine peso and Turkish lira.

On Wednesday, foreign exchange traders sold dollars following the currency’s weakness abroad, especially against emerging peers. The dollar fell 1.9% against the Colombian peso and about 1% against the Chilean peso, the South African rand and the Turkish lira, for example.

The rollovers of foreign exchange futures contracts in the wake of the monthly dispute for the formation of the end-of-month Ptax also pulled the dollar down. Although some analysts estimate that the price of the dollar has been stretched to approach 5.80 reais, there is little belief that pressures on the currency will ease in the short term.

This Wednesday Bradesco raised its expectations for the dollar at the end of 2021, from 5.30 reais to 5.60 reais. “Fiscal uncertainties have increased risk premiums, worsened financial conditions and prevented the exchange rate from stabilizing, adding uncertainty to the scenario,” said the bank in a note in which it announced a cut in the projection for GDP performance and an increase in estimates for inflation and interest.

The bank stressed, however, that the figures presuppose formal maintenance and compliance with tax rules, in addition to the proper management of the pandemic, which will enable the reopening of a good part of the sectors this semester. The recent discussion in the market is about the risk of noncompliance with the spending ceiling in the face of the confusion created around the 2021 Budget, considered unworkable.

The general rapporteur of the Budget, Senator Marcio Bittar (MDB-AC) decided that he will cancel the amendments of his authorship, in a total of 10 billion reais, as soon as the Budget Law of 2021 is sanctioned.

While specialists abroad see the continued recovery of the dollar – which would be an additional setback to the real -, here UBS BB sees domestic drivers as more relevant.

“If inflation proves to be more persistent than the consensus and the BCB currently expect and inflation expectations for 2022 start to rise above the 3.5% target, then the independence of the new BC will be tested by the markets,” he said. in a recent note the economist Fabio Ramos, in which he raised the projection for the dollar at the end of 2021 from 4.95 reais to 5.30 reais.

“We expect that financial conditions will become less friendly for emerging markets in the second half, and the starting point for the real to face this more challenging external environment in the second half will likely depend on the progress of the reform agenda,” he added.

Some houses have an even more pessimistic scenario for the real – the case of Société Générale, which foresees a dollar of 6.20 reais at the end of the second quarter, due to “weak domestic elements” and “less favorable external environment”.

Credit Suisse’s strategy team abroad believes that the dollar will test levels around the range of 5.87-5.97 reais. “Only a clear break from these levels, however, would suggest a resumption of the upward trend and confirm a great continuation pattern of upward ‘triangle’, with the next resistance at R $ 6.31 and then at R $ 6.50” said the bank.

The record high for the closing dollar is R $ 5.9012 and was reached on May 13 of last year.

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