The Brazilian real strengthened to 5.17 per USD from a three-month low of 5.22 on July 2nd, as weak US labor data raised the likelihood of a wider interest rate differential between the Federal Reserve and the Central Bank of Brazil (BCB). The real continues to be supported by this rate gap, with Brazil’s benchmark Selic rate at 14.25% compared with the US policy range of 3.50%–3.75%. The substantial yield advantage has continued to attract foreign capital inflows and underpin the Brazilian currency.
On the domestic front, gross public debt in May exceeded market expectations, and the primary deficit also came in wider than anticipated. The deterioration in fiscal metrics has reinforced expectations that borrowing costs will remain elevated for longer, sustaining upward pressure on interest rates. At the same time, Brazil’s annual inflation climbed above 4.8% in the first half of June, surpassing the central bank’s upper target band of 4.5%.
