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Brazil Interest Rate: Shock to Boost Real, But For How Long?

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 The real situation in Brazil, one of the world's worst-performing currencies this year, will push interest rates higher than the central bank expects on Wednesday and pledges another in May.

The central bank's aggressive start, in anticipation of its recent eruption of foreign exchange market interventions, is at the beginning of its tightening cycle.

The U.S. on Wednesday. While the Federal Open Market Committee has indicated that it is in no hurry to raise US interest rates, it should also keep an eye on the dollar, which has provided another level of support for emerging-market currencies.

City and Barclays global FX power-house strategists are among those recommending real buying through the derivatives markets, on the assumption that it will strengthen against the dollar in the coming weeks, and even months.

The medium-term outlook, however, may be less certain.

Although Brazil's central bank has raised the cost of assumptions by 75 basis points to 2.5 percent and said it will probably do so again in May, the real interest rate will remain negative for some time to come, and so investors are relatively exceptional.

Inflation is hovering around 5.2% and hitting more than 7% before declining in the middle of the year. The central bank's own forecast on Wednesday was its final year-end 5.0%, which is its official. above the official target of 3.5%.

In addition, there is a consensus among economists that while the central bank's rate-setting committee, known as copom, has embarked on a cycle of drastic measures, the final issue for interest rates may not have changed much. This comes against the backdrop of a terrible public health crisis.

Brazil is now a global center of COVID-19 pandemic, and a deadly second wave and slow vaccination program is a threat to the economy and public finances.

"The real one is likely to benefit from the outcome of the FOMC and Copom meetings in March, but it is not yet out of the woods. UBS strategists wrote in a note on Thursday that the evolution of the pandemic and vaccine rollout in the very near term is important for real.

Morgan Stanley strategists on Wednesday slammed the Brazilian and U.S. Following the policy move, he withdrew his recent call for real selling and warned that "medium-term risks remain intact."

On the domestic rate front, the key issue for real long-term performance will be the extent to which investors' expectations are on the tight cycle shift of the corps. Yet, the signs are not so much.

Ahead of Wednesday's decision and statement, more than 100 economists in the central bank's weekly "Focus" survey unanimously agreed that Celik would end at 4.5% this year and 5.5% next year.

The currency move on Thursday provided a real indication of how tight the previous price had been. It rallied sharply in the open, about 2% at a time, but by noon barely 1% rose to around 5.54 percent.

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