Dollar over BRL 5.00 again on fear of a second wave of COVID-19

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The dollar is up again, back to the level of BRL 5.00, and breaking a sequence of three weeks downwards. The U.S. currency ended Friday at BRL 5.0460 (up 2.24%). At the day’s high, it exchanged hands at BRL 5.11, closing the week with gains of 1.20%. The feeling of risk returned to the market due to concerns over a second wave of COVID-19 in the United States and Europe. The difficulty of the United States in controlling the virus and making the economy react increases uncertainty in markets and justifies the dollar rise.

The Fed confirmed expectations and kept the U.S. prime interest rate between 0% and 0.25%. Fed’s chairman Jerome Powell signaled interest rates will remain low until 2022, which in theory would encourage global markets. However, some caution remains, given the uncertainty regarding the positive signs of the latest U.S. labor market report.

The Fed’s more dovish stance (with low interest rates) associated with deflation in Brazil, with the IPCA inflation index at -0.38% in May, must lead the Monetary Policy Committee (Copom) to go on with cuts in interests in the next June meeting. The expectation is for an 0.75% cut in the prime interest rate, bringing the Selic rate to 2% per year. Bets grow the cycle of cuts will go on in the next meetings. This could be a differential for the Brazilian currency against the dollar.

In the domestic political field, little news. The market keeps an eye on the unfolding of the lawsuit against fake news and the judgment of the Bolsonaro-Mourão slate in the 2018 elections. The evolution of Covid-19 also deserves attention due to the mismatch of information and disarticulation of actions to mitigate the pandemic effects on the economy.