The USD/BRL exchange rate drifted upwards on Monday morning and approached its all-time high ahead of the upcoming Federal Reserve and BCB interest rate decisions and the US election, which will have implications on the agricultural commodity market. It rose to 5.86, its highest level since May 2020.
Fed decision ahead
One of the top USD/BRL news will be Wednesday’s Fed decision, in which officials are expected to continue cutting interest rates in a bid to supercharge the labour market.
If this happens, the Fed will slash rates by 0.25%, bringing them to between 4.75% and 5.0%. This decision will come a few days after the Bureau of Labor Statistics (BLS) published weak official jobs numbers.
The data revealed that the economy created just 12k jobs in October, the lowest addition in months. It was also much lower than the ADP estimate of 126,000.
The Fed has recently become highly focused on the labour market as the unemployment rate has moved to above 4.1%. It also believes that inflation is on a path towards 2.0%. The most recent data showed that the headline Consumer Price Index (CPI) and Personal Consumption Expenditure (PCE) retreated to 2.4% and 2.2%, respectively.
This Fed’s decision will be notable because it comes on the same day that Americans will know who the next president is. Polls show that Donald Trump and Kamala Harris are significantly close in most swing states, meaning that the election could move in either direction.
A Trump win will be key for the USD/BRL pair because of its impact on the agricultural sector since he has pledged another trade war. If he implements more tariffs, it means that Brazil’s crops like corn and soybeans will become more valuable since China will focus its retaliation on the sector.
BCB interest rate decision ahead
The other key USD to BRL news will be the upcoming Brazilian central bank decision scheduled on Nov. 2.
Unlike the Federal Reserve, the Central Bank of Brazil has been hiking interest rates. It hiked rates by 0.25% in the last meeting, bringing the official rate to 10.75%. Now, analysts expect that the bank will continue hiking, bringing the benchmark rate to 11.25%.
These rate hikes are coming even as Brazil’s inflation remain stubbornly high. The most recent data showed that the headline CPI rose from 4.25% in August to 4.42% in September.
Therefore, the Fed and BCB divergence could lead to a carry trade situation, where investors borrow the low-yielding US dollar to invest in Brazil. Besides, the spread between the two countries’ interest rates has continued to widen in the past few months.
Read more: Brazilian companies face mounting challenges as rate hikes and currency pressures intensify
USD/BRL technical analysis
USD/BRL chart by TradingView
The weekly chart shows that the USD/BRL exchange rate has drifted upwards in the past few months, and is now nearing its all-time high. It has flipped the important resistance point at $5.74, its highest point in October 2021.
The pair has remained constantly above the 50-week and 100-week moving averages, which have recently made a bullish crossover. Also, the Relative Strength Index (RSI) and the MACD indicators have pointed upwards.
Therefore, the path of the least resistance for the pair is bullish, with the next point to watch being at 5.97, its previous all-time high. A break above that point will lead to more gains, with the next point to watch being at 6.0.
The other alternative is where the pair retreats and retests the 50-week moving average at 5.3651, which is about 8.55% below the current level.
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