US Dollar, Brazilian Real Brace for FOMC and Selic Rate Decisions

2019-09-18 00:00:00

Dimitri Zabelin, Analyst

Brazilian Real, Selic Rate Decision, US Dollar, FOMC Meeting –TALKING POINTS

BCB expected to cut Selic rate by 50bp – Brazilian Real may fall if officials amplify dovish expectations
Global markets will also be turning their attention to the FOMC rate decision: will the Fed ease up?
US Dollar may rise on risk aversion if Powell cools aggressive rate cut bets as global economy slows

Learn how to use political-risk analysis in your trading strategy !

For the rest of the week, global markets may have to contend with significant volatility as several central banks prepare to announce their rate decisions against the backdrop political turmoil and flailing oil markets. In Brazil, policymakers are anticipated to cut the benchmark Selic rate by 50 basis points, leaving it at an all-time low of 5.50 percent. Markets are expecting for interest rates to be as low as 5.00 percent by year-end.

Taking it “Easing”

Source: Bloomberg.

Economic ailments from 2018 spilled over into 2019 as the country wrestles with passing key pension reforms that could be only thing standing between them and a recession according to Finance Minister Paulo Guedes. Foreign direct investment has made a significant recovery after plummeting to six-year lows on a quarterly timeframe, and geopolitical oscillations and wobbly growth prospects has kept investors on their toes.

Lackluster growth and weakening demand for iron ore out of China – Brazil’s largest trading partner – has caused previously “symmetric” inflationary pressure to now tilt to the downside. Uncertainty about progress on the structural reforms has been a key factor behind waning consumer and producer confidence. BCB policymakers – much like the BoE and Brexit – are somewhat constrained by the local political environment.

Yields Declining as Investors Anticipate More Rate Cuts Down the Road

Source: Bloomberg. Note: Decline in bond yields and CDS spread during election signaled markets were optimistic about Bolsonaro’s pension reform and the ability of his government to stabilize the country’s finances.

FOMC Rate Decision: Volatility Ahead

The headline event risk for the week will be the FOMC rate decision with overnight index swaps pricing in an 85.4 percent chance of a 25-basis point rate cut. However, the market’s ultra-dovish expectations for further easing could be once again cooled by Mr. Powell who has reiterated for the past year that the central bank is on a data-dependent path.

What is more telling, however, is how the US Dollar has performed against this backdrop. Despite market expectations growing increasingly more dovish, the Greenback has continued to rise. This suggests that the US Dollar’s appeal as the most liquid currency is rising, possibly indicating underlying premonitions about future market conditions.

US Dollar Climbs Despite Mounting Rate Cut Bets