FX.co ★ BRL Weakens After BCB and Fed Rate Decisions

The Brazilian real traded near 5.15 per USD in June, weakening after the latest interest rate decisions by Brazil’s central bank and the US Federal Reserve. Brazil’s Monetary Policy Committee cut the Selic rate by 0.25 percentage points to 14.25% per year, while signaling that future moves will depend on incoming economic data. In the US, the Federal Open Market Committee left its benchmark rate unchanged at 3.50%–3.75%, but adopted a notably hawkish tone regarding the outlook for monetary policy.

The currency’s depreciation reflected a deterioration in the expected interest rate differential between Brazil and the US, a key driver of portfolio flows from foreign investors. Expectations of lower rates in Brazil, combined with the prospect of higher-for-longer rates in the US, have eroded the relative attractiveness of Brazilian assets, lending support to the dollar against the real.

At the same time, oil prices declined following the signing of a US–Iran agreement aimed at ending the conflict and reopening the Strait of Hormuz. The prospect of more secure oil supplies and reduced geopolitical risk eased energy-related inflation expectations.