USDBRL should reflect inflation in Brazil and the US, American GDP, Congress economic agenda, and Middle East conflict

Bullish factors

• Disclosure of economic data for the United States may show that the country's economy remains strong even in the face of the Fed's monetary tightening. This supports the interpretation that interest rates will remain high for longer and contribute to strengthening the USDBRL.
• Elections in Argentina could raise the perception of risks for other countries in the region and temporarily reduce investment in Brazil, weakening the BRL.
• A worsening of conflicts in the Middle East could increase foreign investors' search for safety, strengthening the dollar against other currencies.
• A possible indication of new directors for the Central Bank may give the perception that future decisions of the Central Bank will be more aligned with the desires of the Executive, which could increase the perception of political risks of Brazilian assets and weaken the BRL.

Bearish factors

• Disclosure of IPCA-15 in Brazil may increase the perception that price moderation in the country is occurring at a slower pace than expected, which in turn would put pressure on the Central Bank to reduce the Selic rate more slowly and contribute to maintaining a more attractive interest rate differential, strengthening the BRL.
• Statements from Federal Reserve authorities may rule out the possibility of another interest rate hike this year due to recent pressures on Treasury yields, weakening the American currency.
• Progress of the federal government's economic agenda in the Legislative branch can reduce the perception of political risks of Brazilian assets and contribute to attracting foreign investments, strengthening the BRL.

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The week in review

The USDBRL ended the week lower, closing Friday's session (20) at BRL 5.0322, a variation of -1.1% for the week, +0.1% for the month, and -4.7% for the year. The dollar index interrupted a sequence of 13 consecutive weeks of gains and closed Friday's session down, trading at 106.0 points, a weekly decline of 0.4%, but a monthly payment of 0.2% and an annual gain of 2.6%. The foreign exchange market reacted to heated data for the economies of the United States and China, tensions with the conflict in the Middle East, speeches by economic authorities of the Federal Reserve, and worse-than-anticipated data for Brazil.

USDBRL and Dollar Index (points)

Source: StoneX cmdtyView. Design: StoneX

THE MOST IMPORTANT EVENT: Data on the American economy

Expected impact on USDBRL: bullish

This week's focus of investors' attention should be the release of essential data for the United States economy. Next to the decision of the Federal Reserve's monetary policy on November 1, the economic agenda of the week brings the first reading for the Gross Domestic Product (GDP) of the third quarter, with a median expectation of annualized growth at 4.1%, against 2.1% in the second quarter. Additionally, the Personal Consumption Expenditures (PCE) Price Index for September will be released, the metric most commonly used by the Fed to track consumer inflation in the US, with a median expectation of a 0.3% increase for both the overall index and the core indicator, which excludes the volatile components of food and energy.

The American economic data continues to surpass analysts' estimates, even more than a year and a half after the beginning of the interest rate hike cycle by the Federal Reserve. Without signs of weakening in productive activity or the job market, the authorities of the US Central Bank maintain a more cautious stance that it is still early to affirm that the inflationary challenge is overcome and that new interest rate adjustments in the future cannot be ruled out. The Fed's firmer stance and the sequence of upbeat data for the US, in turn, boosted yields on US Treasury bonds to their highest level since 2007.

US Treasury Yield Curve (% p.a.)

Source: US Department of the Treasury. Design: StoneX.

In recent weeks, however, some Federal Reserve officials, including its president, Jerome Powell, have argued that if the high yields of Treasuries are sustained, they may reduce the need for further increases in US interest rates, as they already represent a tightening of the country's financial conditions by making loans and financing more expensive for individuals and businesses. Additionally, the geopolitical tensions with the serious conflict between Israel and Hamas and the fears of the Israeli army's ground invasion of the Gaza Strip increase global risk aversion. It raises demand for US government bonds, contributing to reducing their yields.

IPCA-15 in Brazil

Expected impact on USDBRL: bearish

This week, the release of the National Broad Consumer Price Index 15 (IPCA-15) for October should also be highlighted, the latest official inflation data available before the next Monetary Policy Committee (Copom) decision. The data should show a moderate growth in consumer prices of approximately 0.3%, pressured by increases in the final price of gasoline, which should keep the accumulated increase in the last 12 months around 5.1%, possibly triggering an alert that price easing in Brazil is occurring at a slower pace than expected and that the Central Bank may have to slow down its plan to cut the benchmark interest rate (Selic).

Economic Agenda in Congress

Expected impact on USDBRL: bearish

After the failed attempt to reach an agreement for the vote last week on the bill proposing the taxation of exclusive investment funds and "offshore" funds, known as high-income funds (PL 4,173/2023), the presentation of the text by the project's rapporteur, Congressman Pedro Paulo (PSD-RJ), has been postponed to next Tuesday (24). While the government proposes a taxation of 15% for long-term national funds, 20% for short-term funds, and 22.5% for offshore funds, the congressman advocates adopting a single tax rate. Additionally, last Thursday (19), the Commission on Economic Affairs concluded the analysis of the Proposed Constitutional Amendment for tax reform (PEC 45/2019) and handed it over to the rapporteur of the matter, Senator Eduardo Braga (MDM-AM). Braga, on the other hand, stated that he must make the Proposal report available to the Senate's Committee on Constitution, Justice, and Citizenship (CCJ) on Tuesday (24), where it would be voted on November 7 and forwarded for consideration in the Plenary on November 9.

New guidelines for the Central Bank

Expected impact on USDBRL: bullish

The Minister of Finance, Fernando Haddad, told journalists that he spoke with Brazil's President, Luiz Inácio Lula da Silva, about possible candidates for the positions of Directors of Relationship, Citizenship and Conduct Supervision, and International Affairs and Corporate Risks at the Central Bank. The mandates of the current directors, Maurício Moura and Fernanda Guardado, end on December 31 of this year. Analysts assess that the trend is for the new nominees to be more aligned with the economic team's vision of the Planalto, which vocally advocates for a faster relaxation of monetary policy.

Argentina's elections

Expected impact on USDBRL: bullish

Javier Milei is the favorite in the polls for the presidential elections in Argentina, which take place this Sunday. There are small chances of the candidate being elected in the first round if they obtain more than 40% of the votes and have a difference of more than ten percentage points from the second place. Last week, the Minister of Finance, Fernando Haddad, highlighted that a victory by the ultraconservative candidate worries the Brazilian government, as the candidate stated that he would abandon Mercosur if elected and would not do business with Brazil.

Key Indicators

Sources: Central Bank of Brazil; B3; IBGE; Fipe; FGV; MDIC; IPEA and StoneX cmdtyView.

Analysis by: Leonel Oliveira Mattos (leonel.mattos@stonex.com), Alan Lima (alan.lima@stonex.com), and Vitor Andrioli (vitor.andrioli@stonex.com).

Translation by Rodolfo Abachi (rodolfo.abachi@stonex.com).

Financial editor: Paul Walton (paul.walton@stonex.com).