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Dollar strength pressures FX markets

October 23, 2017

Expectations of a boost to the U.S. economy strengthened the dollar and pressured FX markets

(full report attached)

Expectations of a boost to the U.S. economy strengthened the dollar

Last week, the U.S. Senate approved a budget proposal increasing the country’s deficit. Expectations that the deficit will be used to finance capital expenditures and thus boost the economy consolidated the view that the Federal Reserve will hike interest rates before year-end. The move strengthened the dollar and pressured emerging market currencies. In Brazil, the exchange rate closed the week at 3.19 reais per dollar, depreciating 1.50% and underperforming its peers (Charts 1, 2, 3 and 4).

Central Bank did not intervene in the FX market

The monetary authority did not intervene in the FX market last week. Its stock of FX swaps now stands at $24 billion (Charts 5 and 6).

Currency inflows in October

The currency flow sustained September’s trend and is positive in October. Last week, $349 million financial inflows outsized $69 million trade outflows. Month-to-date, the flow is positive by $1.2 billion (Charts 7 and 8).

New bond offerings abroad

A financial institution issued $1.0 billion in bonds due in 2024. An airline company placed $400 million in securities expiring in 2024 as well. Brazilian bond offerings abroad total $26.5 billion in the year through October, topping the $20.4 billion issued during 2016 as a whole (Chart 9 and table).  

Foreign flows to the stock market are negative in October

Foreign flows to the stock market are negative by $1.3 billion this month, as $1.3 billion outflows from the futures market outsized $39 million inflows to the spot market (Chart 10).

Institutional investors increased their short position in dollar futures

Last week, institutional investors increased their short position in dollar futures by $970 million to $10.6 billion. Other FX derivatives positions were virtually unchanged. Non-residents, banks and institutional investors hold positions of $15.9 billion, $14.6 billion and -$7.7 billion, respectively (Charts 11, 12, 13 and 14).



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