Where does the dollar go? See what analysts say

The dollar rose almost 4% in April, after falling 15% in the first quarter. The oscillation reflects the change in the mood of investors, who began to expect a more difficult context for Brazil with the hardening of the fight against inflation in the United States and internal turmoil with the polarization of the electoral race for the Planalto Palace.

Analysts consulted by Sheet state that it is unlikely that the dollar will oscillate much below R$ 4.70 until the end of 2022, as it did in the first quarter of the year, although the fundamentals for the formation of the exchange rate – such as parities between countries in terms of trade abroad, purchasing power and the relationship between interest and inflation—could sustain this price for longer.

On the other hand, they consider that there is little room for a new climb to the level of R$ 5.70, as recorded at the beginning of the year. The scenario projected at this moment is for a rate around R$ 5, although they recognize that the unpredictability of the variables that influence the exchange rate makes it impossible to accurately target the future price of the American currency.

Despite a certain consensus on the exchange rate horizon, the road ahead is bumpy. Oscillations became even more expected after the outbreak of Covid in China and Russia’s decision to intensify its military action in Ukraine and raise the tone of threats to the West.

Regarding whether or not to buy international currency for an international trip, the unpredictability of the exchange rate leads to a basic recipe: looking for the average price. The rule is to buy equal amounts of dollars at regular intervals in the period between the start of planning and shipment.

What analysts say

Nicola Tingaschief economist at Acrefi (National Association of Credit, Financing and Investment Institutions), considers that the dollar only fell in the first quarter because the real was excessively devalued last year.

This year, interest rates high enough to offset Brazil’s risks at a time of uncertainty abroad, shares of local companies growing in the wake of rising commodities and even a certain lull in domestic politics helped attract investors to Brazil.

However, in Tingas’ assessment, the worsening of the international scenario in the last month left little room for maintaining a fair price, below R$ 4.80.

Economic fundamentals are not the only variables determining the exchange rate. Expectations about the country’s future are also included. In this sense, the policy may weigh more in the short term, as it did in the second half of 2021.

Fernanda Consortchief economist at Banco Ourinvest, argues that the recent rise in the exchange rate is also an adjustment to the approach of the electoral period and to the polarization of the dispute between two candidacies, that of President Jair Bolsonaro (PL) and that of former President Lula (PT ).

A fierce dispute, with the government and opposition in conditions of success, alerts investors to the growth of fiscal risk, which at this moment can be understood as the fear that an escalation of populist decisions and promises could harm the execution of the Budget in the coming years.

Daniel Miraglia, chief economist at Integral Group, also considers that the exchange rate has already started to show the price of the election and that the trend is for this to intensify. But he reinforces that it is what happens abroad, especially in the United States, that will dictate the pace of the market until the end of the year.

The US central bank, the Fed (Federal Reserve), took its benchmark interest rate from zero in March, in addition to ending a program that injected billions of dollars into the financial market through the purchase of real estate and Treasury bonds.

The abundance of liquidity stimulated the economy during the most acute phase of the pandemic, but also heated up the consumer market before the normalization of the supply of goods and inputs, which remains hampered by the strict policy to combat Covid in China. The result was the biggest price hike in four decades.

To try to stop inflation, the Fed raised its rate by 0.25 percentage point just over a month ago and is expected to apply increases of half a point or more at each of its six scheduled meetings through the end of this year. A tightening that was unthinkable not long ago and that puts the world on alert for a sharp slowdown in the global economy.

Higher interest rates in the United States tend to attract investors who were positioned in riskier countries, such as Brazil, to the country’s sovereign bonds.

One sign that this process is underway is that yields on US Treasury benchmark bonds are at the highest level since 2018. It is a move that reveals investors’ expectations of increasing gains in the country’s fixed income.

For Sandra whitechief strategist at Órama, investors’ search for refuge in the protection of assets linked to the dollar becomes an even stronger trend with the prolongation of the war in Ukraine and the rebound of Covid in China.

In both cases, the main threat is inflation. The benchmark price for crude oil, Brent, has been floating above $100 a barrel since the start of the war. And while lockdowns in China’s major cities to contain the coronavirus potentially reduce demand for fuel, a further shutdown in the country would further tighten the bottleneck on the overall supply of products.

Daniel Weeks, chief economist at Garde, says that Brazil can benefit from the lack of good investment alternatives among large emerging economies. According to him, the country gains from the effect of high commodity prices on activity, offers a high interest rate and has some political stability, when compared to Russia, Turkey and China, for example.

Also in the economist’s assessment, part of the dollars coming from the record trade surplus projected for 2022 should enter the country, something that did not happen last year. In 2021, the trade balance recorded a record surplus of US$ 61 billion, but US$ 9.8 billion actually entered Brazil.

“We will have a very strong trade balance. This money did not enter [no país] in 2021. This year, it should enter, because interest rates are higher”, says Weeks.

He projects an exchange rate of R$ 4.75 at the end of this year and R$ 4.85 at the end of 2023. And he says that part of this return of the dollar should help reduce inflation rates from the second half of the year.

Bruno capussotreasury director at Banco Fator, states that it is natural that the real suffers more in the current scenario after the strong appreciation in the first quarter.

“The appraisal process has gone on standby, but I don’t think it’s stopped,” says Capusso.

He affirms that the country’s position as an exporter of commodities and the interest rate differential in relation to abroad are the main lines of defense to avoid a stronger devaluation of the national currency. Even in a scenario where interest rates in the United States rise more than currently projected.