Foreign and domestic fiscal debate impact exchange rate more than Selic, says Santander

With the interest rate differential between Brazil and abroad already reached with the aggressive monetary tightening promoted by the Central Bank, the global scenario and the internal fiscal debate are now more relevant to the direction of the exchange rate in the short term than the final level of the Selic , evaluated the chief economist of Santander Asset, Eduardo Jarra.

He considers the possibility of the BC delivering inflation to the target low this year.

Santander Asset expects the dollar to close 2022 at R$5.60.

As Jarra pointed out, this is basically the level at the end of 2021, with the real ending the year with a small variation, but vulnerable in the meantime to a back-and-forth guided by global uncertainties – especially US monetary policy – ​​and by the low visibility in a internal scope marked by the elections and their potential consequences for the fiscal field.

“Unlike 2021, in 2022 we can walk with still tight financial conditions, levels of economic uncertainty above usual. It is difficult to speak of a great appreciation or depreciation of the exchange rate”, said Jarra.

“The movement (of the exchange rate) depends on the local issue, it is a factor that opens the dam a little. Going forward, based on the modeling, 2023 would be a real converging closer to its fair value, currently averaging R$5 (per dollar) down. The exchange rate today is more depreciated than the fundamentals suggest”, he added.

The exchange rate appreciation seen this year – the real rose 5.1% against the dollar, one of the best global performances – took place amid the return of foreign flows to Brazil in a broad context of demand for emerging market assets.

So far, around US$ 4 billion have been sold by international investors through dollar futures contracts, foreign exchange coupons and B3 foreign exchange swaps.

The field of vision on the continuity of this movement, however, is short, said the economist.

“We were surprised by the intensity of the movement (of the flow). I think I could have clues about him, but not to that extent. The next steps are even more difficult to trace. We have to keep monitoring it, and it will continue to be a relevant factor in the short term.”

The foreign flow is attracted in part by rising returns embedded in real-backed fixed-income contracts – which for one year are more than 11.5%.

But according to the chief economist at Santander Asset, the rate differential is already at a reasonable level and discussing whether the Selic will stop rising at 11.75% a year or 12.25%, for example, is more ancillary in terms of scenarios for the exchange.

“And this reading also applies to other assets (stocks, fixed income)”, he said.

“In a space of three to six months ahead and within what would move asset prices more relevantly, I would place what the BC did and what it can do in the next meetings in third place. It would put the global first and second in the fiscal policy framework in the context of the election.”

The capital attraction effect exerted by higher interest rates could be more clearly seen in the event of a reduction in exchange rate volatility, as a result of satisfactory developments in global and domestic variables, said Jarra.

Inflation Target

Santander Asset estimates that the Central Bank will stop raising interest rates after raising the Selic rate by 100 basis points at the March Copom meeting – a scenario, according to Jarra, already foreseen by the private bank.

This year’s inflation will be 5.7% in the economist’s accounts, well above the 5.00% defined by the CMN as the upper limit of the tolerance band, within which the 3.50% target is found.

On Wednesday, the Central Bank raised the basic interest rate by 1.50 percentage points for the third consecutive time, to 10.75% per year, in continuation of the aggressive cycle of monetary tightening implemented to contain inflation, and surprised part of the market by indicating a reduction in the pace of adjustment at the next Copom meeting, in March.

“This signal reflects the stage of the tightening cycle, whose cumulative effects will manifest over the relevant horizon. The Copom emphasizes that the future steps of monetary policy may be adjusted to ensure the convergence of inflation to its targets, and will depend on the evolution of economic activity, the balance of risks and inflation projections and expectations for the relevant horizon of monetary policy. , said the BC collegiate in a statement.

“The BC is saying with this phrase that it is looking, seeking (the goals of) the years 2022 and 2023, but within this weighting for it, 2023 is more relevant than 2022”, said the economist at Santander Asset.

“The BC is still eyeing 2022, now the possibility of it delivering the target considering the ‘lags’ (lagged effects) of monetary policy and everything else is low”, he concluded.