Two Warning Signs Last Week: Inflation and Exchange Rate
Last week, the IPCA-15 data for July and the volatility of the Real emitted two clear warning signs. The increase of 0.72% of the IPCA-15, higher than the consensus projection of 0.65%, was the first alert. Although the diffusion index dipped below its annualized quarterly rate, it was 70%, with strong persistence of the adjustments of the prices of manufactured goods. Despite three hikes of 75 basis points, the SELIC rate is still zero in real terms, indicating the Central Bank remains “behind the curve”.
The week was also marked by high volatility of the Real. Contrary to the recent appreciation trend, during which (for a few hours) it strengthened to slightly below R$5.00/US$, it then began to depreciate again, hovering around R$5.20/US$. This was not an isolated movement; instead it was accompanied be weakening of the currencies of the great majority of other countries. Various international events influenced these movements. First, both the Federal Reserve and ECB lowered the weight of inflation in their reaction curves. Central banks in general are strongly concerned over the recovery of their respective economies.
It’s likely that the recent acceleration in the decline of the yield on Treasuries is more the fruit of the Fed’s policy goals than a flight to quality trend triggered by the increased risk aversion due to the fear of the economic effects of the Delta variant in Europe and Asia. With respect to the Real, at R$5.20/US$ it continues to have weakened since the start of last year more than the currencies of the great majority of other countries, reflecting the persistence of a risk premium.
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