Dollar retreats with fiscal risk on the radar and inflation below expectations

O dollar fell 0.31%, quoted at R$ 4.874, around 9:30 am this Thursday (9), on a day of weak performance abroad. The currency gives back some of the strong gains against the real in recent days, linked to investor concerns about a new fiscal risk in Brazil, which is pulling investments out of the country.

Risk aversion is linked to the announcement of a Proposed Constitutional Amendment (PEC ) that seeks reduce fuel prices .

The idea is to exempt federal taxes on diesel and gas, and create a fund to financially compensate states that exempt ICMS from charging Gasoline . The economic team estimates an impact of around BRL 40 billion in public accounts .

At the same time, the market reflected in this session the release of the Broad Consumer Price Index (IPCA) for May, which came in below expectations and reinforced a deceleration in inflation after the peak in April.

Étore Sanchez, chief economist at Ativa, states that “today’s IPCA is a source of relief in the recent pressure for a more austere posture by the Central Bank, but such prospects for the Selic also remain very susceptible to the projects being processed in Congress” .

In this session, the Central Bank will auction up to 15 thousand traditional foreign exchange swap contracts for the purpose of rolling over the maturity date of August 1, 2022.

On Wednesday (8), the dollar rose 0.34%, to R$ 4.89. already the Ibovespa closed down 1.55%, at 108,367.67, the lowest level since May 19 and with the biggest percentage drop since May 18.

overall feeling

Investors still maintain a strong global risk aversion triggered by fears about a possible general economic slowdown due to a series of interest rate hikes around the world to contain record levels of inflation, which would harm many types of investments.

The main cause for this aversion is the cycle of high interest rates in United States with the most recent increase announced by the Federal Reserve on May 4th. The autarchy has already ruled out 0.75 percentage point hikes in interest rates, or a risk of taking the country’s economy into a recession, but signaled at least two more hikes of 0.5 pp.

Higher interest rates in the United States attract investments to the country’s fixed income due to its high security and favor the dollar, but harm bond markets and stock exchanges around the world, including the US.

At the same time, the market follows the data on the country’s economy to understand how aggressive the Fed could be in the process. THE confirmation of the contraction of the US economy in the first quarter, for example, reinforced the view that the autarchy should not be as aggressive in raising interest rates as expected.

On the other hand, with the end of lockdown in the Chinese city of Shanghai and easing restrictions in the capital Beijing, Chinese demand is expected to return to previous levels, which again favored commodity exporters and relieved some of the pressure on the real.

With the two novelties, the Ibovespa and the real found room for appreciation. Any change in these perceptions, however, harms both.

*With information from Reuters