Sep 08, 2017

Improved Economic News results in Stronger Brazilian Currency

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

A recent spate of encouraging economic news in Brazil has resulted in a stronger Brazilian currency. The Brazilian currency strengthened to its strongest point in three months closing on Wednesday at 3.10 per U.S. dollar. There was no trade on Thursday due to a national holiday.

The markets in Brazil have been encouraged due to a number of factors including: a slowly improving domestic economy, declining inflation, the increasing possibility that the Brazilian Congress will take action on revising tax policy and Brazil's pension system, the Brazilian Central Bank's decision to reduce the prime interest rate 1% to 8.25%, and the unlikelyhood that Lula will return to the presidency.

The prime interest rate in Brazil is now at its lowest level since October of 2013 and it could decline even further to 7.25% by the end of the year, which would equal its lowest level in recent history. The highest prime rate in recent years was 14.25% in July of 2015. The Brazilian Central Bank uses the prime interest rate to control inflation. During the 12 months that ended in August, inflation was 2.46%, which was the least inflation since the twelve months that ended in February of 1999. With the recent increase in fuel prices, inflation is expected to creep back up to 3.3%.

The Brazilian GDP is now expected to increase 0.5% in 2017 and the most optimistic estimates has it increasing 3% in 2018. The combination of lower interest rates and lower inflation is expected to give the Brazilian economy a much needed boost after the worst recession in modern times.

While all this encouraging economic news is good for the economy and the country, a strengthening currency is not necessarily good news for Brazilian farmers. When the local currency is strong, it makes grain exports less competitive and it results in lower domestic grain prices.