Itaú BBA - Trade war fears pressure FX markets

FX and Capital Markets

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Trade war fears pressure FX markets

July 2, 2018

BRL underperformed peer currencies last week

(full report attached)

BRL underperformed peer currencies 

Growing concerns about a trade war between the U.S. and China pressured emerging market currencies last week. In Brazil, the exchange rate closed at 3.88 reais per dollar, depreciating 2.4% and underperforming its peers (Charts 1, 2, 3 and 4).

Central Bank slowed down FX interventions

Last week, the monetary authority carried out a $3.0 billion line auction and ceased FX swap contract offers. On Friday, the Central Bank repeated that its actions will be guided by market conditions. Its stock of FX swaps now stands at $67 billion (Charts 5 and 6).

Currency inflows in June

The currency flow remained positive during the month. However, the flow was slightly negative last week, as $766 million financial outflows topped $665 million trade inflows. In June, the flow was positive by $4.7 billion (Charts 7 and 8).

No external bond issuances last week

There were no issuances by Brazilian companies abroad last week. Year-to-date, Brazilian bond offerings overseas total $15.1 billion (Chart 9 and table).  

Foreign flows to the stock market are negative

Foreign flows to the stock market were negative by $371 million in June, as $1.9 billion outflows from the spot market outsized $1.5 billion inflows to the futures market (Chart 10).

Investors maintained their FX swap positions virtually unchanged

After a few weeks after of sharp increases, investor positions in FX derivatives were virtually unchanged.  Non-residents, banks and institutional investors hold FX derivative positions (dollar futures, cupom cambial and swaps) of $33.3 billion, $17.4 billion and $14.7 billion, respectively (Charts 11, 12, 13 and 14).

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