Dollar closes at a high of 1.12% with Lula’s speech and fear of recession in the USA

The dollar closed this Wednesday’s session (18) up by 1.12%, at R$5.1626, inflated by fear of fiscal worsening, in the wake of statements by President Lula on minimum wage and income tax, and by the strengthening of the American currency against emerging currencies due to fears of recession in the USA. The day was marked by extremes, with fluctuations of more than 10 cents between the low (R$ 5.0668), in the first trading session, and the high (R$ 5.1743), in the afternoon. Despite the spike today, the dollar is still down more than 2% in January.

In the morning, the real appreciated in line with the external wave of risk appetite that dominated business. The 0.5% decline in the US producer price index (PPI) in December (against a forecast of +0.1%) reinforced bets on a more lenient stance by the Federal Reserve (Fed, the US Central Bank) in conducting monetary tightening. The appreciation of commodities also played in favor of the Brazilian currency, with oil prices rising by more than 2%.

Over the course of the afternoon, however, the external picture deteriorated. The American currency zeroed low in front of strong pairs and settled high in relation to emerging ones. Stock exchanges in New York deepened losses and renewed lows, while oil changed signs. The Brent contract for March closed down 1.09% at US$84.98 a barrel. Instead of relief with the cooling of inflation, the fear of a recession in the US spoke louder, given the above-expected decline in retail sales and industrial production in December. Main hawk of the American BC, the president of the district of St. Louis of the Fed, James Bullard, again said that the basic rate must quickly reach 5% and projected Fed Funds between 5.25% and 5.5% at the end of the year.

“The market was encouraged by inflation data, reinforcing the hypothesis that the Fed will not need to raise interest rates after the rise in the next meeting. But the news that a large American bank is going to freeze hiring affected the stock exchanges in New York and brought risk aversion , contaminating emerging markets”, says economist Cristiane Quartaroli, from Banco Ourinvest, in reference to information that Bank of America (BofA) advised executives to curb hiring in anticipation of a possible downturn in the economy.

To the change in mood abroad was added discomfort with Lula’s speech after meeting with trade union centrals for debate on the new minimum wage. First came the announcement of the creation of an interministerial working group with a deadline of up to 90 days to propose a policy to increase the minimum wage. Lula said that the “minimum has to grow according to the GDP”. The Minister of Labor, Luiz Marinho, stated that the current minimum wage of R$1,302 will be valid at least until May.

Lula went beyond the debate on the minimum wage and guaranteed that he will make changes to the Income Tax to increase the exemption range for those earning up to R$5,000, as promised in the election campaign. “We are going to change the logic, lower the tax for the poor and increase it for the rich. Let’s put the poor on the budget and the rich on the Income Tax”, said the president.

“Lula’s speeches reversed the market’s optimism and took the dollar to its highs. Skepticism regarding fiscal control still weighs on the market”, says the product director at Venice Investimentos, André Rolha, noting that the real has benefited in this beginning of the year of rising commodity prices, with the reopening of the Chinese economy.