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Analysis: Exchange rate will be key for monetary authority

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Vincent

In the coming days, the evolution of the exchange rate will be fundamental in the inflation projections that will support the decision of the Monetary Policy Committee (Copom) of the Central Bank next week.An appreciated real against the dollar, as seen earlier last week, may help the Central Bank to show an inflation projection less distant from the 2023 target and therefore reduce the pressure for a stronger monetary tightening.On Friday, however, the real weakened sharply against the dollar as a result of a signal from Federal Reserve Chair Jerome Powell that a 50 basis points hike in U.S. benchmark interest rates is on the table.The Brazilian Central Bank intervened in the exchange rate, with a sale of $571 million. The action was justified to maintain functionality in the exchange rate, in a market session squeezed in the middle of a long holiday. But in the end, it prevented a further weakened real.Another doubt is the uncertainties about the Chinese economy, with the prospect of a more severe lockdown being enacted in Beijing to contain the latest wave of coronavirus contagion in the country. Iron ore prices dropped about 10% on Monday.The exchange rate has no direct relation with monetary policy, but has gained prominence recently for two reasons.One was Central Bank President Roberto Campos Neto’s remarks that market sectors were not taking into account the new, lower exchange rate in their inflation projections.There hasn’t been a reliable indicator of market projections for inflation since March 25...

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