The Brazilian real has declined beyond 5.30 per US dollar, pulling back from its peak in May 2024. This movement is in part due to increased expectations of a dovish shift by the central bank, coinciding with the US dollar regaining some ground following last week’s losses. Economic indicators showed weakness, with the IBC-Br index decreasing by 0.2% in September and preliminary third-quarter activity contracting approximately 0.9% quarter-on-quarter. This combination negatively impacts export earnings and short-term tax revenue outlooks.
The central bank has maintained the Selic rate at 15%, with its president emphasizing a strictly data-dependent approach to monetary policy, which has created uncertainty regarding the timing of rate cuts. Concurrently, the likelihood of a Federal Reserve rate cut in December has been reduced, elevating US rate expectations and tightening the cross-border carry trade. The resumption of US economic data releases has filled the informational void that previously benefited emerging markets. Additionally, subdued industrial activity in China has led to declines in commodity prices and volumes, diminishing the trade dynamics that typically bolster the Brazilian real.
