Dollar Decline in Brazil and Easing Inflation Expectations Pulled Interest Rates Down

Interest rate futures traded on Brazil's B3 stock exchange closed lower in medium and long-term maturities due to the dollar's depreciation and a limited improvement in inflation expectations. While short-term interest rates followed a relatively stable course, the overall outlook maintained a downward trend. This decline was supported by the behavior of the American Treasury bond yield curve and the dollar's 0,71 percent depreciation. Market participants noted that trading was relatively calm throughout the day and that the aforementioned macroeconomic factors directed pricing. These developments have played a significant role in shaping market expectations regarding the Brazilian central bank's monetary policies.

The interest rate of the January 2027 Interbank Deposit (DI) futures contracts fell to 13,985 percent from 13,998 percent in the previous session. Similarly, the January 2029 DI contracts dropped to an intraday low of 14,03 percent from 14,26 percent at Friday's close. The yield on the longer-term January 2031 contracts decreased from 14,406 percent to 14,29 percent. These data show that the market is making a cautious but optimistic pricing regarding future interest rate cuts. This medium and long-term decline indicates that investors' short-term concerns regarding Brazil's macroeconomic balances have somewhat diminished.

The Focus bulletin, the Brazilian Central Bank's weekly market survey, revealed that the median value of this year's Broad Consumer Price Index (IPCA) expectations was revised from 5,33 percent to 5,30 percent. In addition, inflation forecasts for 2027 increased from 4,17 percent to 4,18 percent, while 2028 inflation expectations remained stable at 3,70 percent. Expectations that Selic, the central bank's benchmark policy rate, will end at 14 percent at the end of 2026, 12 percent in 2027, 10,5 percent in 2028, and 10 percent in 2029 remained unchanged. These expectations once again reveal how critical the fight against inflation is as a medium-term priority for the government.

Heritage Capital portfolio manager Eduardo Cohn evaluated that the stabilization of inflation expectations, which had been worsening for a few weeks, in the Focus bulletin and the dollar's decline helped the interest rate curve. According to Cohn, apart from these factors, there was no major catalyst to direct the market during the day. Gabriel Mollo, an analyst at Daycoval Corretora, stated that the combination of weaker economic activity, a more controlled inflation outlook, and a decline in oil prices strengthens the possibility of a new rate cut in the Selic interest rate in August. However, Mollo pointed out that a part of the market continues to be cautious due to inflation expectations still being above targeted rates and risks regarding fiscal discipline.

In the domestic market, trading volume was observed to remain at low levels following the resumption of transactions after the Independence Day holiday in the United States of America. The statements made by Treasury Undersecretary Rogério Ceron regarding a possible intervention in the inflation-indexed bond (NTN-B) market did not have a significant impact on the interest rate futures in this session. For the auction to be held on Tuesday, market representatives predict that the supply of inflation-indexed public bonds will remain limited again. Furthermore, it was stated that the decline in the 2- and 10-year Treasury bond yields in America, following repricing related to discussions about the US central bank's monetary policies, was also among the external factors affecting domestic transactions.