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We expect the Brazilian real to reverse some of its gains

The sharp rally in the Brazilian real against the US dollar since the start of the year has shown tentative signs of ending, and we think that it will weaken a bit through the end of 2022. In view of the wider interest, we are also sending this FX Markets Update to clients of our Latin America Service.
Jonathan Petersen Markets Economist
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FX Markets Weekly Wrap

Dollar rallies as hope for a Fed pivot proves short-lived

The huge upside surprise in US payrolls data pushed the greenback higher against most major currencies today in an otherwise quiet week for FX markets. The continued strength of the labour market in the US adds to our conviction that the Fed remains some way off from taking its foot off the brakes, a message echoed by several Fed officials earlier in the week. By contrast, many other central banks face more difficult trade-offs: the latest labour market data from New Zealand and Canada showed falls in employment; the BoE and RBA both hiked by 50bp but revised their forecasts to reflect higher inflation and lower growth; and some emerging market central banks appear to be at or near the end of their tightening cycles. Next week’s US CPI data, which we expect will show continued strong core price pressures even if headline inflation slows, could put another nail in the coffin of the ‘pivot’ narrative. Even in the absence of further divergence in monetary policy, we expect slowing global activity and worsening risk sentiment to, underpin further strength in the greenback over the rest of the year.

5 August 2022

FX Markets Outlook

We think the dollar rally still has further to run

We think the dollar will appreciate further through at least the end of the year as the global economy continues to falter and “safe-haven” demand remains strong. Although we see limited scope for a further widening of expected interest rate differentials in favour of the greenback, we expect an environment in which the Fed and other major central banks continue to tighten monetary policy, even as economic growth slows, to support further dollar strength. We expect risky assets to remain under pressure for some time yet, and we believe that long-term yields have already peaked for this cycle. And previous peaks in the 10-year US Treasury yields have, more often than not, coincided with further dollar appreciation. We think a similar story will play out this time around as safe-haven demand makes the dollar, alongside the yen and the Swiss franc, the best performing currencies over the rest of this year and, probably, some way into 2023.

4 August 2022

FX Markets Weekly Wrap

Dollar struggles on market’s hope of a Powell pivot

The dollar looks set to lose further ground this week after the FOMC’s 75bp hike was, somewhat strangely, interpreted as the start of a dovish pivot and US Q2 GDP disappointed. However, the greenback has rebounded a bit today after income and spending data proved more robust and indicated continued strong price pressures. Our sense is that the risk-on response to the FOMC is largely down to a combination of wishful thinking and stretched positioning. In our view, there was little in Chair Powell’s remarks to suggest policymakers will abandon aggressive rate hikes while inflation remains so far above target. Indeed, he emphasised that policymakers anticipate that bringing inflation back to target will involve ”a period of below-trend growth and some softening of labour market conditions” – an unusual admission from a central bank governor. If we are right that markets have misread the Fed’s intention, the dollar will probably resume its rally before too long.

29 July 2022

More from Jonathan Petersen

Capital Daily

We suspect the rally in the Brazilian real is nearing its end

This week the Brazilian real has reversed some of its rally against the US dollar, and we think there is scope for it to weaken a bit further this year.

8 April 2022

FX Markets Weekly Wrap

Dollar treads water amid global tightening cycle

Another solid gain in US payrolls did little to boost the dollar today, which seems set to end the week little changed against most major currencies. During the course of this week, central banks in Chile, Czechia, and Colombia continued to tighten policy, while the latest inflation data pushed up investors’ expectations – and, indeed, our own – for the paths of policy rates in the euro-zone and Switzerland. The lack of substantial monetary policy divergence over the next few years may limit the extent to which the dollar will strengthen against other currencies in the short term. But we still think the dollar could edge higher in this broad-based tightening cycle once emphasis shifts from how fast to how far central banks will tighten, given our view that the US is better-placed than most major economies to tighten above its “neutral rate” in this cycle.

1 April 2022

FX Markets Chart Book

We think the dollar rally has stalled, not ended

The rally in the dollar seems to have paused this month, and indeed the greenback has fallen against some major currencies – especially those in Europe – this month. We think this largely reflects the rebound in risk sentiment, the stabilisation of commodity prices, and the synchronised rise in government bond yields both in the US and other DMs. While these three factors may prove headwinds for the greenback in the short-term, our view remains that the current global backdrop, on balance, still points to renewed appreciation in the dollar.

31 March 2022
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