Itaú BBA - Potential rate hike in the U.S. pressures FX markets

FX and Capital Markets

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Potential rate hike in the U.S. pressures FX markets

March 6, 2017

As expectations for an increase in the benchmark interest rate in the US intensified, the BRL weakened.

(full report attached)

Possibility of monetary tightening in the U.S. pressured several currencies last week

As expectations for an increase in the benchmark interest rate in the next meeting by the Federal Reserve’s Federal Open Market Committee (FOMC) intensified, the Brazilian currency weakened. Nevertheless, the BRL outperformed most peers, depreciating just 0.2% (Charts 1, 2, 3 and 4).

Central bank did not intervene in the FX market last week

Last week, the monetary authority did not intervene in the FX market. The outstanding amount of FX swaps now stands at $22 billion (Charts 5 and 6).

Currency outflows in February 20-24

In the last week of the month, $4.1 billion financial outflows outsized $2.6 billion trade inflows. In February, the currency flow was negative by $4.6 billion (Charts 7 and 8).

No external bond issuances last week 

There were no bond issuances abroad by Brazilian companies last week. Brazilian corporate bond offerings total $7.7 billion year-to-date (Chart 9 and table).   

Foreign flows to the stock market are negative

Foreign flows to the stock market are negative by $19 million in March, driven by $36 million outflows from the spot market and $17 million inflows to the futures market (Chart 10).

Investors changed their positions in FX derivatives

Last week, non-residents increased their long position in dollar futures by $3.7 billion and reduced their long position in cupom cambial by $1.6 billion. Institutional investors expanded their short position in dollar futures by $2.1 billion, while decreasing their short position in cupom cambial by $2 billion and their long position in FX swaps by $2.2 billion. Non-residents, banks and institutional investors hold positions of $11.4 billion, $18 billion and $ -7.5 billion, respectively (Charts 11, 12, 13 and 14).


 



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