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August 23, 2018

Brazilian Currency Continues to Weaken

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

The Brazilian currency continues to weaken against a strengthening U.S. dollar with the exchange rate now approaching 4.1 Brazilian reals per U.S. dollar. The weakest the Brazilian currency has been against the dollar was on January 21, 2016 when it traded at 4.16 per dollar.

The reasons for the weakening Brazilian currency include: uncertainty concerning the Brazilian presidential elections in October, higher interest rates in the United States, currency problems in emerging markets especially Turkey, and general risk-off approach on the part of currency traders.

With the Brazilian presidential election quickly approaching, recent polls indicate that there is no clear favorite that could win 50% of the vote and avoid a runoff at the end of October. Ex-president Lula is currently in prison pending his appeal on corruption charges, but his party has already nominated him to be their candidate for president. His candidacy is uncertain because the Brazilian Supreme Court has not yet decided if he will be allowed to be on the ballet.

Brazilian law dedicates that a candidate for federal office must have a "clean slate" as far as any criminal convictions are concerned. Lula's supporters contend that he is appealing his conviction so therefore, his conviction is not yet certain. If Lula is included in the polling, he is the leader. If Lula is not included in the polling, then the leader is a current congressman named Jair Bolsonaro. Both of the leading candidates are polling in the mid-30% range, which is not enough to avoid a runoff.

The candidate most favored by the market is Geraldo Alckmin from the PSDB party, which is the same party of the current president Michel Temer. If Lula is allowed to compete for the presidency, it would greatly reduce the chances that Alckmin could make it to the runoff.

Another important reason for the weaker Brazilian currency is the fact that the Federal Reserve has already increased interest rates in the U.S. twice this year and the speculation is that they will increase rates two more times by the end of the year. This makes the dollar a more attractive investment especially in light of the currency problems in emerging markets such as Turkey and neighboring Argentina.

The currency exchange is very important for Brazilian farmers since grain is priced in dollars, but paid in the local currency. The weaker the local currency, the more money a farmer puts in his pocket whenever he sells his grain. In fact, many time the change in the exchange rate is more important to Brazilian farmers than the change in the actual price of grain.

Domestic soybean prices are currently quite good in Brazil due to the strong demand for soybeans from China. Brazilian ports are exporting record amounts of soybeans on a monthly basis given the trade issues between the U.S. and China and the fact that the soybean crop in Argentina, which is the third largest producer, was severely impacted by drought in 2017/18.