Forex
Brazil currency faces volatility as Lula criticises rates, central bank intervenes
SAO PAULO (Reuters) -Brazil’s currency faced a choppy market on Monday, opening sharply lower against the U.S. dollar after renewed criticism of interest rate levels by President Luiz Inacio Lula da Silva but paring losses after a central bank intervention.
Speaking in an interview with TV Globo aired late on Sunday, the leftist leader called the interest rate hikes “irresponsible” and said his government would “take care of that,” hinting at potential policy changes ahead.
Next (LON:) year, the central bank rate-setting board will have a majority of members chosen by Lula, including his pick for governor.
The Brazilian real initially weakened 1% against the U.S. dollar, continuing a steep decline triggered by market disappointment with a much-anticipated spending cut package unveiled by the government in late November.
But losses were trimmed after the central bank announced a spot dollar auction in which it sold $1.63 billion, a move it had also deployed on Friday. The bank will also hold a dollar-denominated auction with repurchase agreements for up to $3 billion on Monday.
Latin America’s largest economy has seen its currency lose nearly 20% this year, ranking among the worst performers in emerging markets.
The downward trend persisted despite the central bank’s move earlier this month to accelerate its monetary tightening pace with a 100-basis-point hike, bringing interest rates to 12.25%, and signal matching moves for the next two meetings.
“The only thing wrong in this country is the interest rate being above 12%. There is no explanation,” Lula said in the interview after being discharged from hospital following emergency surgeries to treat and prevent bleeding in his head.
“Inflation is around 4%, fully controlled,” he added. “The irresponsible ones are those who are hiking interest rates, not the federal government. But we will take care of that.”
The central bank’s hawkish move this month cited the market’s negative reception of the fiscal package as a factor worsening inflation dynamics, as inflation expectations drift away from the regulator’s 3% target.
A weekly central bank survey of private economists continued to show higher median inflation forecasts for this year and the next, despite economists now projecting interest rates to peak at 14.25% in March.
Brazil’s 12-month inflation ended November at 4.87%, above the upper end of the bank’s 1.5% to 4.5% target range, while policymakers have vowed to bring inflation back to 3%.
Lula has been a vocal critic of high interest rates and slammed central bank governor Roberto Campos Neto, an appointee of former right-wing President Jair Bolsonaro, multiple times since taking office for a third non-consecutive term in 2023.
Campos Neto’s term ends this month and he will be replaced by Lula-nominated Gabriel Galipolo.
Next year Lula appointees will hold a 7-2 majority on the bank’s nine-member rate-setting committee, up from the current 4-5 minority.
Investing.com – The US dollar has gained strongly since the US presidential election in November, but these gains are unlikely to limit the hit that US customers are likely to face from tariffs, according to UBS.
At 08:25 ET (13:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 108.950, but was around 1.5% higher over the last month, and remained not far from the more than two-year high seen last week.
The theory is that a stronger dollar lowers US import prices, said analysts at UBS, in a note dated Jan. 17. Those lower prices would partially offset the tax payments US consumers must make to the US Treasury when buying imports.
If the US paid for the Chinese imports, then a stronger dollar would automatically reduce the amount of dollars paid (fewer dollars are exchanged to pay the renminbi price). However, the US pays for practically all its imports in dollars, so this does not happen.
If the dollar strengthens, the dollar price is unchanged, unless the exporter consciously chooses to lower the dollar price of the goods sold, UBS added.
An exporter to the US might deliberately lower dollar prices, as (in dollar terms) local currency costs are lower. But local currency costs are only a fraction of a manufacturer’s costs.
“A Chinese electronics manufacturer, importing chips (bought in dollars) and exporting computers to the US (in dollars), will probably keep their dollar prices stable—ignoring currency moves,” UBS added.
The US dollar strengthened against China’s renminbi in 2016 and 2018/19, and US import price inflation for products from China showed no noticeable break with earlier trends.
The preference seems to have been to reroute supply chains as a way of avoiding trade taxes.
Investing.com – The US dollar slumped Monday following a report that indicated that President-elect Donald Trump was set to delay imposing trade tariffs immediately upon his inauguration, an expectation which had boosted the US currency following his November election victory.
At 09:20 ET (14:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 1.1% lower to 108.020, having climbed to a more than two-year high last week.
The Wall Street Journal reported Monday that Trump is planning to issue a broad memorandum on his inauguration that directs federal agencies to study trade policies and evaluate US trade relationships with China and America’s continental neighbors—but stops short of imposing new tariffs on his first day in office.
The memo, which the WSJ has seen, suggests that debates are still ongoing within the incoming administration over how to deliver on Trump’s campaign trail promises for hefty tariffs on imports from trade rivals such as China.
The dollar has gained around 4% since the November presidential election as traders anticipated Trump’s policies will be inflationary, necessitating higher interest rates for a longer period.
“Financial markets are on tenterhooks to see what executive orders newly elected US President Donald Trump will enact on his first day,” said analysts at ING, in a note.
“FX markets are most interested in what he has to say about tariffs and what kind of pain the Oval Office plans to inflict on major trade partners.”
Bank of America (BofA) noted a significant increase in repo rates during the week of January 13 due to heightened liquidity demand triggered by tax payments and limited funding provided by the People’s Bank of China (PBoC).
The liquidity squeeze was most noticeable on January 16, the day following the tax payment deadline, with DR007 and R007 reaching 2.34% and 4.19%, respectively.
The PBoC maintained its stance on defending the exchange rate stability, resulting in the tightness of (RMB) liquidity being felt in the offshore market as well.
On January 9, the central bank announced it would issue RMB60 billion of 6-month bills in Hong Kong, a significant increase compared to previous issuances. The coupon rate of 3.4% was notably higher than the December issuance, reflecting the tightness of CNH liquidity and subdued demand from investors.
The December FX settlement balance by banks’ clients fell further to a deficit of US$10.5 billion, the first deficit reading since July 2024. A key change from the previous month was a sharp increase in USD demand for service trade. Reports also suggest that domestic importers have been actively purchasing USD via FX forward to hedge against tariffs risk in recent weeks, which has been exerting upward pressure on forward points.
On January 13, the PBoC increased the cross-border macroprudential parameter to 1.75 from 1.50. This move allows domestic corporations and Financial Institutions (FIs) to conduct more cross-border borrowing.
Given the widened interest rate gap between China and overseas, BofA believes this is more of a symbolic move by the PBoC to anchor market’s expectation on FX.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
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