High interest rates, low exchange rate (for how long?)

CAUSE: The first few weeks of the year were marked by a greater appetite for risk in the markets overall, and as a result, our exchange rate benefited, moving from a rate of R$6.20/US$ at the end of last year to R$5.80/US$ more recently—an appreciation of over 6.0%. Interest rate decisions in the US and here in Brazil were the main drivers of this improved risk perception, as the rise in the Selic rate makes Brazilian assets more attractive to foreign investors, stimulating capital inflows and strengthening the real. At the same time, the Federal Reserve's decision not to raise rates reduces pressure on the dollar, favoring the appreciation of emerging market currencies like the Brazilian real. We should also note that we had a few weeks of reduced liquidity due to the New Year holiday in China, as well as an absence of political noise in Brazil during the Congressional recess.

CONSEQUENCE: While the appreciation of the real reduces import costs, helping to curb inflation for imported goods and inputs, a stronger exchange rate can hurt the competitiveness of Brazilian exports, especially in the agricultural and industrial sectors. Furthermore, maintaining high interest rates makes credit more expensive and tends to slow down consumption and investment, which could negatively impact economic growth in the medium term. Additionally, it is worth noting that it is too early to say that this drop in the exchange rate is a trend, as we are still in a very adverse and challenging environment, both regarding uncertainties about the new Trump administration and fiscal issues in Brazil. The market still does not expect an exchange rate below R$6.00/US$ for this year or next.

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