The Long View

For those who missed last week's brief, please click?here.

Last week, we were hoping for a stronger local inflation figure and a weaker US jobs report – but got neither. Local inflation came in lower than expected, though still above the target range, while a much stronger-than-expected US jobs report pushed USD/BRL closer to 6.14. With the US economy showing no signs of nearing a recession, inflation is now firmly back in focus for the Federal Reserve. Future interest rate decisions will likely be driven more by inflation data than job?market performance. Each data release will continue to drive volatility in the FX market, as the US inflation trend remains unclear amid sticky short-term price pressures and uncertainty around potential tariffs and economic policies. Between Wednesday and Thursday of last week, USD/BRL fluctuated between 6.15 and 6.03, driven by speculation over tariff cuts, followed by Trump confirming higher tariffs. Expect similar policy-driven volatility throughout the year.

Two weeks into the year, and it already feels as though Donald Trump has been president for a year. Beyond his outlandish remark about "buying Greenland," the real focus remains on how potential import tariffs might impact US trading partners like Brazil. The threat of a 100% tariff on BRICS nations, should they continue to undermine the USD, could render Brazilian goods uncompetitive in US markets, potentially forcing closer ties with China, which is already grappling with its own economic challenges. While this might be an idle threat, it’s enough to keep markets jittery, adding to the volatility.

On the domestic front, the upcoming congressional elections will be pivotal in shaping Brazil's policy direction over the next two years. Hugo Motta (Lower House) and Davi Alcolumbre (Senate) are the frontrunners, and neither has direct ties to President Lula or the PT. However, alliances will inevitably form, potentially influencing the 2026 presidential and governor?elections. More pressing is the need for internal fiscal measures to address the rising debt-to-GDP ratio. Brazil’s issue lies with its internal debt, not external debt. The country has minimal external debt and substantial central bank reserves, but nearly half of its domestic debt is linked to short-term rates. If the central bank’s focus survey is accurate, interest rates could reach 15% this year, further increasing debt servicing costs. With GDP expected to slow, a higher debt-to-GDP ratio seems inevitable medium term. This is why we remain cautious on USD/BRL for now.

That said, the exchange rate won’t move daily on fiscal concerns alone. There will be moments of opportunity, as?local or international data emerges. Starting January 21 – President Trump’s inauguration – expect a flood of executive orders with global market implications. Investors should remain vigilant, seize small wins where possible, and avoid trying to second-guess the market.