Factors that should push the dollar above R$6
Experts point out that Brazil is becoming less and less attractive compared to other emerging markets, which has weighed on the exchange rate.
By Rodrigo Tolotti, from Infomoney - Amid another sharp rise in the dollar against the real, the American currency is heading towards surpassing the R$ 6 mark just two months after reaching R$ 5 for the first time in history, in a scenario not only of crisis due to the coronavirus, but also of great political tension.
On Wednesday (13), the commercial dollar closed with an appreciation of 0,61%, quoted at R$ 5,9007 for buying and R$ 5,9012 for selling, renewing its historical high once again.
As the negative scenario solidifies in the country, analysts have begun to successively revise their projections, indicating that the American currency should indeed surpass R$ 6 soon, although there is no expectation that it will end the year at this level.
More recently, Deutsche Bank has been quite pessimistic, pointing out that the The dollar could reach R$ 6,50. As Brazil faces the worst recession in its history, the coronavirus pandemic exposes unfinished reforms in Brazil, in addition to the political landscape.
But the most recent scenario revision came from Credit Suisse, with analysts maintaining a more pessimistic stance and setting a short-term price of R$ 6,20, highlighting precisely the situation of political risks and low interest rates, which make the so-called carry trade (an operation in which the investor borrows money at low interest rates and invests in countries with higher interest rates to profit from the difference) unattractive.
According to analysts, since the last scenario update at the end of April, political turbulence has dominated the exchange rate, with "concerns related to President Jair Bolsonaro's legal problems and Minister Guedes' position in the administration [of the economy]".
"The risk of judicial pressure on the president could pave the way for more generous fiscal spending (to secure support in Congress), which would be viewed negatively by Guedes, and consequently by the market," explains Credit Suisse.
Furthermore, analysts also point to the Central Bank's aggressive monetary policy, which cut the Selic rate to 3% and has already indicated that it will make another reduction of up to 0,75 percentage points. "The combination of political risk and aggressive fiscal and monetary policies has raised concerns regarding the sustainability of these measures in Brazil," they state.
Credit Suisse also says it has doubts about the future of the exchange rate and that carry trade is likely to remain unattractive compared to other emerging market currencies.
On the other hand, the bank's analysts point out that "we may have positive surprises from external events such as a faster improvement in the Covid-19 situation, which could potentially create better conditions for the currency, but the current political situation is unlikely to support the exchange rate, and so we maintain our rather cautious bias."
Meanwhile, José Faria Júnior, director of Wagner Investimentos, highlights the country's fiscal problem, something he had been warning about since the beginning of the quarantine in São Paulo two months ago. According to him, the government's initial R$ 80 billion package was weak, and an increase in the amount of measures to around 10% of GDP was expected, while the situation of public accounts should lead to gross debt close to 100% of GDP.
“This disaster in public finances, coupled with the increase in Covid-19 cases, has weighed too heavily on the currency, even more so with the Selic rate potentially falling to 2,25% or perhaps even less,” says the analyst, who is skeptical about recommending selling the currency now, with his projection model pointing to the possibility of the currency reaching R$ 6,10.
With the sharp economic and political deterioration in the country and an "extreme" monetary easing, BofA also revised its year-end exchange rate projection from R$ 5,20 to R$ 5,85. Several factors could "easily" push the dollar above R$ 6, according to the report, such as the acceleration of Covid-19 cases and internal political clashes.
“We expect the political noise to remain high while the Attorney General hears testimonies and gathers evidence to decide whether to file a formal accusation against President [Jair] Bolsonaro in Congress. The political noise could affect the reform agenda and the fiscal normalization process next year. This will keep the real under pressure in the short term,” they state.
Earlier in the week, Banco Fibra had already revised its exchange rate projection, stating that the currency could soon exceed R$ 6. The institution revised its estimate for the average dollar in 2020 to R$ 5,46, compared to the previous estimate of R$ 5,39. For the end of the year, Fibra now estimates the exchange rate at R$ 5,75, compared to the previous estimate of R$ 5,50.
“Beyond the global factors related to the Covid-19 pandemic – which increase global uncertainties by strengthening the dollar and some other currencies considered 'safe havens' – exclusively domestic factors justify our scenario of a structurally weak real in the coming years, such as low real interest rates, low growth rates of potential and actual GDP, a significantly negative exchange rate flow, a worsening of the terms of trade, and noise caused by the government itself,” said Fibra.
“We recognize a bias towards further depreciation due to domestic factors (political noise). Specifically for the coming months, we understand that the real could even trade above R$ 6, as the public health and economic crises may be amplified by political noise,” the bank stated.
Itaú was another bank that also raised its exchange rate forecast, which jumped from R$ 4,60 to R$ 5,75 this year. For 2021, the new projection is R$ 4,50, compared to R$ 4,15 previously.
Despite the negative projections, the average economist still does not expect the dollar to end the year at R$ 6. In the most recent Focus report, which compiles the projections of various economists, the projected scenario for 2020 is for a lower exchange rate, with the dollar settling at R$ 5,00. For 2021, the forecast has risen to R$ 4,83, compared to R$ 4,75 expected the previous week. Thus, even if the dollar falls from current levels, the expectation is that there will not be such a rapid decline due to a combination of a complicated fiscal scenario, political tension, and low interest rates.