USDBRL should reflect Fed statements, the Mid East conflict, Brazilian economic data, and Chamber of Deputies economic agenda

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, supporting the interpretation that interest rates will remain high for longer and contribute to strengthening the USDBRL.
• Disclosure of economic data for China may reinforce the perception that the economic recovery in the country is slower than anticipated and decrease the appetite for risky assets, weakening the BRL.
• A worsening of conflicts in the Middle East could increase foreign investors' search for security assets, strengthening the dollar against other currencies.

Bearish factors

• 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 legislature can reduce the perception of political risks of Brazilian assets and contribute to attracting foreign investments, strengthening the BRL.
• Disclosure of economic data for Brazil can reinforce the perception that the country's economic activity is better than expected, contributing to attracting foreign investments and strengthening the BRL.

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The week in review

The USDBRL ended the week higher, closing Friday's session (13) at BRL 5.0888, a variation of -1.4% for the week, +1.2% for the month, and -3.6% for the year. The dollar index closed higher for the thirteenth consecutive week on Friday's session, trading at 106.4 points, with a weekly gain of 0.6%, a monthly gain of 0.6%, and an annual gain of 3.0%. The foreign exchange market reacted to the start of conflicts between the Palestinian group Hamas and Israel, the publication of the minutes of the last monetary policy decision of the Federal Reserve, the release of inflation data from Brazil and the United States, and comments from Fed officials on the trajectory of interest rates in the country.

USDBRL and Dollar Index (points)

Source: StoneX cmdtyView. Design: StoneX

THE MOST IMPORTANT EVENT: Statements from Federal Reserve

Expected impact on USDBRL: bearish

The focus of investors' attention this week should be the speeches and public comments of Federal Reserve (Fed) officials. Scheduled to speak this week are the Fed Chairman, Jerome Powell; the president of the Philadelphia Fed, Patrick Harker; the president of the New York Fed, John Williams; the member of the Fed's Board of Governors, Michelle Bowman; the member of the Fed's Board of Governors, Christopher Waller; the member of the Fed's Board of Governors, Lisa Cook; the vice president of the Fed, Philip Jefferson; the president of the Chicago Fed, Austan Goolsbee; the vice president of Fed Supervision, Michael Barr; the president of the Atlanta Fed, Raphael Bostic; the president of the Dallas Fed, Lorie Logan; and the president of the Cleveland Fed, Loretta Mester.

After weeks of consistent pressure from US Treasuries due to expectations that the Fed would keep interest rates higher for longer, this expectation was partially alleviated this week after Fed members argued that they would take into consideration in the next monetary policy decisions the recent increases in US bond yields since, in practice, they already represent a tightening of the country's financial conditions by increasing the costs of loans and financing for individuals and businesses. Accordingly, financial agents reduced their bets on a new interest rate hike by the Fed in 2023, and Treasury yields declined.

US economic data

Expected impact on USDBRL: bullish

However, the root of the pressure on interest rates remains unchanged, and American data remains surprisingly heated, which poses risks to the price stabilization process and, therefore, would require the country's central bank to maintain interest rates higher for a longer period. Last week, a slightly higher reading than expected for the Consumer Price Index (CPI) in September and another week of reduced initial jobless claims reinforced the interpretation that a process of interest rate cuts by the Federal Reserve remains outside the horizon of expectations. This week, the release of retail sales and industrial production data in September should show that the country's economy continues to expand steadily, albeit slightly slower than in August, which could strengthen the US currency.

Economic agenda in the Chamber of Deputies

Expected impact on USDBRL: bearish

The vote on the bill regarding the taxation of exclusive and offshore investment funds, known as high-income funds (PL 4.173/2023), was scheduled for next Tuesday (17) in the Plenary of the Chamber of Deputies. The project is under a constitutional urgency regime and prevents voting on any other matter until its appreciation. According to the Minister of Finance, Fernando Haddad, there is a high consensus on the matter; however, the final report text is still undergoing some last technical adjustments. The taxation of funds is part of a set of measures by the Lula government's economic team to increase revenue in 2024 to achieve the goal of zero primary results, that is, primary expenditure identical to primary revenue.

Brazil economic data

Expected impact on USDBRL: bearish

The activity indicators for Brazil will also be monitored, with the release of August services and retail sales data for the country, as well as the Central Bank's Economic Activity Index (IBC-Br) for the same month. While retail is expected to decline compared to July, a slight increase is expected for the performance of services and the IBC-Br, reinforcing interpretations of resilience above expectations for the Brazilian economy in 2023.

China economic data

Expected impact on USDBRL: bullish

The week will bring several indicators for the Chinese economy, such as retail sales, industrial production, fixed asset investment, unemployment rate, and short and medium-term interest rate decisions. However, the focus will be on disseminating the Gross Domestic Product (GDP), which is expected to decrease its growth compared to the same period last year from 6.3% in the second quarter to 4.4% in the third quarter. Although some data in September showed a faster recovery, the overall trend in the third quarter was a slowdown in productive activity.

War between Hamas and Israel

Expected impact on USDBRL: bullish

It is worth noting, finally, that market agents are following the developments of the bloody conflict between Israel and the Palestinian group Hamas, with fears of an Israeli army ground invasion of the Gaza Strip. The fights cause insecurity and risk aversion among investors, and international oil prices have shown particular volatility in this context.

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).