Brazilian Real Tests May 2024 Highs

The Brazilian real strengthened past 5.18 per US dollar testing it highest level since May-2024 amid high domestic carry, clearer monetary policy guidance, and a weaker US dollar. Central bank minutes signalled that easing is likely to begin in March but stressed a strictly data dependent pace, reinforcing expectations of gradual cuts and keeping real yields attractive with the Selic still at 15%. This predictable policy path trimmed the policy risk premium without triggering a dovish repricing. At the same time, a softer US dollar further supported inflows into high yielding emerging market currencies. External fundamentals also helped, as favourable terms of trade, strong export receipts, elevated iron ore shipments, and projections for a large trade surplus continue to underpin foreign currency inflows and ease external financing concerns. Still, persistent fiscal uncertainty and political noise cap upside by sustaining a latent risk premium.

The Brazilian real strengthened toward 5.22 per US dollar, rebounding toward its strongest levels since May 2024 as markets digested the latest Brazilian central bank’s decision minutes. Policymakers signalled easing is likely to begin in March but emphasized that the pace and size of cuts will remain strictly data dependent, an outcome viewed as a predictable transition rather than a dovish shock. This reduced the policy risk premium and supported carry and duration inflows while the Selic remained elevated at 15%. A softer US dollar against emerging market and commodity currencies further eased pressure on USD BRL and improved the real’s appeal to foreign investors. Support was reinforced by favourable terms of trade and steady foreign demand for Brazilian assets anchored in high real yields. Elevated US yields have had limited spillover so far, allowing domestic factors to dominate, though persistent fiscal uncertainty and political noise continue to cap upside.

The Brazilian real weakened past 5.26 per US dollar, pulling back from its strongest levels since May 2024 as renewed US dollar strength and shifting global rate dynamics reduced support for high carry currencies. Externally, the move reflects the dollar’s rebound after January’s decline, driven by firmer US activity data and the nomination of Kevin Warsh as the next Federal Reserve chair, which reinforced expectations of tighter liquidity conditions and a more disciplined balance sheet approach, lifting US yields and increasing the opportunity cost of holding BRL. Domestically, while Copom has maintained the Selic at a restrictive 15%, policymakers have reiterated that any future easing will remain conditional on sustained disinflation and fiscal discipline, limiting expectations for additional upside from Brazil’s already well priced real yield advantage and offering little fresh support to the currency.