BRL Hits Strongest Level in Over Three Weeks

The Brazilian real strengthened to 5.11 per USD from 5.17 in early July, it's highest level in over three weeks, tracking other emerging market currencies as the US dollar weakened. Risk appetite improved after signs that diplomatic talks between the US and Iran are continuing despite recent tensions, easing geopolitical concerns and reducing demand for safe-haven assets. Domestically, the real also found support after Brazil's annual inflation slowed to 4.64% in June, below market expectations. Still, lingering risks of renewed Middle East disruptions and the prospect of further Federal Reserve tightening continued to limit gains.

The Brazilian real rose to 5.17 per USD from the three-month low of 5.22 on July 2nd as weak labor data from the US threatened to stretch the rate differential between the Fed and the BCB. The interest rate differential remains supportive for the real, with Brazil's benchmark Selic rate at 14.25% compared with the US policy range of 3.50%-3.75%. The wide yield gap continued to attract foreign inflows and support the Brazilian currency. Domestic gross public debt rose above forecasts in May, while primary deficit was wider than expected. The deterioration in fiscal accounts reinforced expectations of higher-for-longer borrowing costs and persistent upward pressure on interest rates. In addition, Brazil’s annual inflation rose past 4.8% in the first half of June, above the central bank's upper target band of 4.5%

The Brazilian real traded near 5.17 per USD in June, strengthening slightly toward the end of the month amid a broader pullback in the US dollar. Softer-than-expected US PCE data eased concerns over additional Federal Reserve tightening, pushing Treasury yields lower and weighing on the dollar against major and emerging market currencies. In Brazil, the BCB’s updated Monetary Policy Report raised the probability of inflation breaching the upper bound of the target range, despite June’s softer-than-expected mid-month inflation reading. Still, the interest rate differential remained supportive for the real, with Brazil’s benchmark Selic at 14.25% compared with the US policy range of 3.50%-3.75%. That wide spread has continued to attract foreign inflows and provide support to the Brazilian currency.