The dollar was below the level of BRL 5.00 last Friday, sold at BRL 4.9860 (-2.86%), for the first time since March. The currency accumulated a 6.6% devaluation over the week. This was the biggest weekly decline for the dollar since October 2008. In 2020, the currency accumulated gains of 24.29%. The good external mood, after the announcement of new stimulus by the ECB to the European Union and, especially, the surprising result of the payroll in the United States justify the dollar’s low.
The report on the U.S. labor market indicated the creation of 2.5 million jobs, against the expectation of a cut of 8.75 million jobs. Here in Brazil, the IBGE indicated a fall in industrial production in April by 18.8%. Even though it was the worst performance since the beginning of the historical series (in 2002), the result was better than the expected 32% decline. In Europe, unemployment rose less than expected too. And in China there were signs of recovery in domestic demand. In general, the idea is that the worst of the pandemic has passed in Asia, Europe, and the United States. As a result, uncertainties have diminished, and the expectation of a faster recovery in the global economy (in the form of a V) is growing, which encourages markets and justifies the dismantling of protection as well as the dollar decline.
In Brazil, the devaluation was also fueled by less conflict between the executive and judicial powers after the decision from the Supreme Court to deny the request for seizure of President Jair Bolsonaro’s cell phone. In general, Brazil’s risk premium decreases, although agents remain cautious. It is good to remember that Brazil is currently the global epicenter of the coronavirus pandemic. The struggle between the three institutional powers, even with the recent lull, still raises many doubts. The abandonment of the fiscal agenda bothers investors, especially foreign ones. These uncertainties tend to hold part of the protection against Brazil, thus giving some support to the foreign currency.
The expectation of another cut by 0.75% in the prime interest rate also increases, bringing the Selic rate to 2% a year. There are also rising bets the cycle of cuts will continue at the next meeting. This move helps draw support to the dollar.