The Brazilian real strengthened beyond 5.18 per US dollar, testing its highest level since May 2024, supported by high domestic carry, clearer monetary policy guidance, and a weaker US dollar. Minutes from the central bank indicated that monetary easing is likely to begin in March, while emphasizing a strictly data-dependent pace. This has reinforced expectations of gradual rate cuts and kept real yields attractive with the Selic rate still at 15%. The resulting more predictable policy path has reduced the policy risk premium without prompting a dovish repricing.
At the same time, the softer US dollar has further encouraged inflows into high-yielding emerging market currencies. External fundamentals have also been supportive: favorable terms of trade, strong export revenues, elevated iron ore shipments, and forecasts of a sizeable trade surplus continue to sustain foreign currency inflows and alleviate external financing concerns. Nevertheless, persistent fiscal uncertainty and ongoing political noise limit further appreciation by maintaining an underlying risk premium.
