Weekly FX – Hawkish Central Bank supports BRL

by: Georgette Boele

Last week, the central bank hiked the SELIC rate by 50bp to 9.5%. This was widely expected by the market. However, the statement surprised. It signalled that rate hikes will continue at the current pace, while the market had expected signals the pace would be reduced. The more hawkish than expected statement supported the BRL. This confirms that the sentiment on the BRL has improved and that fears have eased. Furthermore, the market is becoming more focused on underlying developments in the economy. Moreover, the confidence in the central bank, of being an inflation fighter, has increased. The conclusion we can draw from all of this is that expectations of higher interest rates have become positive for the BRL again. This is in contrast to the period May-August of this year when expectations of higher rates were BRL negative, because sentiment was negative. Going forward we expect USD/BRL to trade around 2.20 towards the end of this year.