June 11, 2018

Volatility is the Name of the Game for the Brazilian Currency

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

One of the big stories last week in Brazil is what happened to the Brazilian currency. The currency weakened during the week to one point last Thursday it was trading at 3.97 to the dollar. The Brazilian Central Bank had seen enough and they entered the market on Friday with a vengeance to defend the currency. The bank wanted to send a message and they did. The intervention last Friday to defend the currency was approximately five times greater than their normal action and they indicated that they would continue to be very aggressive in defending the currency.

By the end of the trading on Friday, the Brazilian currency was trading at 3.70 or a strengthening of 5.5% in one day. This was the largest daily change since October 13, 2008 when it weakened 7.3% in one day in response to the global financial crisis.

The Brazilian Central Bank indicated that they would prefer to calm the market through currency intervention to defend the real instead of having to increase interest rates to calm investors. The prime interest rate in Brazil (the Selic) is at a modern day historic low of 6.5% and there is speculation that the rate may need to be increased in order to calm investors.

The financial situation in Brazil took several big hits over the last several weeks including:

  • The truck driver strike costed the Brazilian economy billions of dollars in lost sales, increased costs, suspended production, lost perishable goods, culled animals, broken contracts, etc.
  • The agreement to lower the cost of diesel fuel will cost the government billions more. Petrobras supplies the diesel fuel for Brazil and they will be forced to sell the fuel at a lost, which will cost the Brazilian treasury billions.
  • The truck driver strike left the Brazilian President extremely weak while he limps to the end of his term prior to a new presidential election in October. As a result, the Brazilian Congress will probably not pass financial reforms concerning pensions and worker rights that he has been pushing. Without these austerity measures, the Brazilian economy will be slower to recover.
  • The political uncertainty in Brazil has left the market very nervous. There may be as many as a dozen candidates for president and no one has a clue as to which way it may go.
  • Increasing interest rates in the U.S. and a stronger U.S. dollar is not good news for the Brazilian currency.
  • All of this led to a significant weakening of the Brazilian currency.
  • On top of this financial uncertainly, there has been a sharp selloff in international soybean prices over the past few weeks, which has added to the uncertainly in the Brazilian agricultural sector.