Brazilian Real Steady Amid Mixed Forces

The Brazilian real strengthened toward 5.8 per USD in February, an over two-month high, as the U.S. dollar weakened, driven by Trump’s decision to postpone tariffs on Mexico, easing trade concerns and a resurgence in inflation.

Earlier, fears of retaliatory tariffs and the broader implications of a potential trade war had heightened Brazil’s vulnerability, particularly as inflation expectations rose.

Meanwhile, investor confidence in Brazil has strengthened due to record employment, rising real wages, and a stronger-than-expected primary surplus, reinforcing fiscal stability.

Additionally, the Central Bank’s recent 100bps rate hike has curbed inflation risks, while declining public debt has mitigated concerns over fiscal sustainability.

These factors, alongside global risk sentiment and trade policy shifts, have contributed to the real’s gains despite lingering inflationary pressures.

The Brazilian real weakened past 5.88 per USD as renewed global trade tensions followed President Trump’s announcement of tariffs on Mexico, Canada, and China, fueling risk aversion and strengthening the U.S. dollar while pressuring emerging-market currencies, including the real.

Fears of retaliatory tariffs and the broader implications of a potential trade war have heightened Brazil’s vulnerability, particularly as inflation expectations rise.

While improved fiscal conditions and a resilient labor market provide some support, trade uncertainties and inflationary pressures continue to weigh on the currency.

Nevertheless, record employment, rising real wages, and a stronger-than-expected primary surplus have bolstered investor confidence in Brazil’s fiscal stability.

Additionally, the Central Bank’s recent 100bps rate hike, aimed at curbing inflation, along with a decline in public debt, has helped mitigate risks from unanchored price expectations, reinforcing the real’s resilience.

The Brazilian real strengthened to around 5.85 per USD, an eight-week high, supported by solid domestic fundamentals.

While the unemployment rate edged up to 6.2% in Q4, real wages rose 1.4%, and the payroll expanded 4.8% YoY in November, underscoring firm household demand.

Brazil’s fiscal position also improved, with gross debt falling to 76.1% of GDP compared to 77.7% in the previous month, and a stronger-than-expected primary surplus in December, easing lingering concerns over fiscal sustainability.

Earlier, the Brazilian central bank raised interest rates by 100bps to curb inflation and signaled further hikes, citing persistent price pressures, unanchored expectations, and fiscal risks, while warning of downside risks from a potential economic slowdown.

Brazil’s improved fiscal outlook and labor market resilience continue to underpin the real, providing room to adapt to potential global trade disruptions amid Trump’s sweeping tariffs.

The Brazilian real depreciated past 5.9 per USD, retreating from an eight-week high of 5.85 reached on January 29th, as investors shifted their focus back to fiscal concerns and a weaker demand outlook for Brazilian exports.

Despite the central bank’s decision to raise the Selic rate to 13.25%, its statement lacked a strong emphasis on inflation control, fueling doubts about policymakers' commitment to anchoring inflation expectations, which remain unanchored.

Investor skepticism surrounding structural reforms, coupled with persistent inflationary pressures and softer commodity markets, has led to amplified capital outflows, further undermining the real's value.

Societe Generale in its early Thursday economic news summary pointed out:

— Foreign exchange rangebound, United States yields reverse post-Federal Reserve gains, risk on after Meta and Tesla earnings. Fed Chair Powell: not in a hurry, expect to see further progress on inflation, waiting to see what policies are enacted. SocGen's call change: two cuts this year instead of four.

— Day ahead: European Central Bank forecast to cut 25bps to 2.75%. Eurozone preliminary Q4 gross domestic product. U.S. preliminary Q4 GDP, SocGen forecasts 2.3% quarter-over-quarter growth seasonally adjusted annual rate (SAAR). U.S. jobless weekly claims. South Africa's central bank forecast to reduce 25bps. Mexico Q4 GDP. Poland 2024 annual GDP.

— Brazil's central bank lifts Selic rate by 100bps to 13.25%, maintains guidance for +100bps in March, options open after and commits to reaching inflation target. SocGen forecasts cycle peak at 15.25%. to resume trading at 5.8650.

— Mexico's President Sheinbaum: doesn't believe the U.S. will impose tariffs from Saturday, says there are conversations, dialogue, but we're ready. offered below 20.50.

— Nikkei +0.3%, EUR 10-year IRS -2bpa at 2.51%, Brent crude -0.1% at $76.5/barrel, Gold +0.5% at $2,767/oz.

The Brazilian real appreciated toward 5.90 per USD in January, marking an eight-week high supported by a combination of favorable external accounts and encouraging domestic data.

Despite a $9 billion current account deficit in December, the real was bolstered by direct investment inflows of $71.07 billion in 2024, exceeding expectations and highlighting continued confidence in Brazil's economy.

Additionally, easing inflationary pressures, with the IPCA-15 at 0.11% in January, bolster confidence that the central bank's aggressive 100-basis-point Selic rate hike will help stabilize prices, maintaining Brazil’s benchmark interest rate as one of the highest globally and attracting foreign capital into local assets.

Meanwhile, softer comments on trade from US President Trump have reduced global risk aversion, while the real remains supported by expectations of resilient commodity performance, particularly with soybeans and iron ore playing a crucial role in Brazil’s export revenue.