Strength of the real is challenged amid the economic downturn – 03/03/2023 – Market

The real’s strength could soon be challenged by growing concerns about an economic slowdown and disagreements between the government and the Central Bank, showed a Reuters poll of currency experts.

The Brazilian currency has hovered around 5.20 per dollar in recent months, after a weak period in the second quarter of 2022, having overcome concerns about volatility in the market over the election period.

This Friday’s (3rd) survey points to an appreciation of the real by 1.9% in the period one year ahead, to 5.10 per dollar, according to the average estimate of 19 exchange rate strategists interviewed on the 28th of February to March 2nd. The dollar was around R$5.19 on Wednesday (1st).

However, analysts have warned of a potentially bumpy phase ahead, amid signs of economic deterioration after a spike in activity last year in response to inflationary spending by former President Jair Bolsonaro.

“Growth concerns are not going away anytime soon and the risks of further monetary tightening by the Federal Reserve are high,” said Edward Moya, senior markets analyst at Oanda. “The real should have more losses in the first half.”

Brazil’s economy shrank by 0.2% in the fourth quarter of 2022, suffering from the late impact of a rise in consumer prices and sharp rises in interest rates.

The country’s main economic authorities, in turn, are deeply divided, with the Central Bank continuing a restrictive monetary strategy that is being attacked by President Luiz Inácio Lula da Silva and ministers in his government.

The survey also showed that the Mexican peso is likely to remain on solid ground after hitting its strongest levels in five years this week, nearly crossing the 18.00 to the dollar mark.

The peso is expected to trade at 19.40 to the dollar in one year, implying a 6.5% loss from Wednesday’s levels, but still close to 20.00 to the dollar, which is considered a healthy level.