On May 30, in a Barchart article, I highlighted that the Brazilian real was steady at twenty cents against the U.S. dollar. In that piece, I wrote:
The real is steady at around the $0.20 level against the U.S. dollar. The short-term trend is slightly bullish, but a break above the $0.22 level could trigger a significant recovery in the real versus the U.S. dollar currency relationship.
Since late May, the real remained below the 22 cents technical resistance level against the U.S. dollar, but the trend remains marginally bullish, and a breakout could be on the horizon.
The trend in the currency relationship since 2020 remains bullish
After reaching a high of $0.6517 against the U.S. dollar in July 2011, the real fell 74.3% to a $0.16756 low in May 2020. Since Brazil’s economy is highly sensitive to commodity prices, the currency reached a peak in 2011 when commodity prices moved to multi-year and record highs and fell to its low in 2020 when the global pandemic gripped markets, sending raw material prices to lows.
The chart highlights the sharp decline of lower highs and lower lows over nine years. After reaching a low in May 2020, the real stabilized and trended slightly higher over the past three years. Since 2020, higher commodity prices have caused the real to trade around the $0.20 pivot point around the U.S. dollar. On August 14, the currency relationship was just above the pivot point.
Brazil is a BRICS country
The BRICS countries include Brazil, Russia, India, China, South Africa, and other allied countries cooperating with the BRICS.
The 2022 “no-limits” alliance between China and Russia, Russia’s invasion of Ukraine, Chinese plans for reunification with Taiwan, sanctions, and retaliatory measures have created a bifurcation of the world’s nuclear powers and leading economies. The U.S. dollar has been the world’s reserve currency for decades. Still, the shifting geopolitical landscape has led some BRICS countries and others to use non-dollar assets for cross-border transactions, causing the U.S. currency’s role to decline.
A BRICS currency could cause an upside breakout
Over the past months, the potential for a BRICS currency with gold backing to challenge the U.S. dollar has increased. While Brazil is primarily a politically neutral country, as a BRICS member, it will likely go with the allied bloc regarding any changes to the worldwide financial system. A successful BRICS currency initiative could lift the Brazilian real against the U.S. dollar, given its neutral political stance and position as a leading raw material-producing country.
The three-year chart shows the Brazilian real’s upward trend against the U.S. dollar. Critical technical resistance currently stands at the April 2022 $0.21773 high.
While currency volatility tends to be low, a BRICS currency could cause a significant upward correction in the Brazilian reals foreign exchange relationship with the U.S. dollar.
A rising real could increase U.S. inflation as it will push some commodity prices higher
Brazil’s climate makes the South American country a leading agricultural commodity producer. As the war in Ukraine continues to rage and Russia withdrew from the grain agreement that had allowed Ukrainian grain to flow from the Black Sea Ports, it has pressured other worldwide agricultural commodity-producing countries to increase output. Brazil is a leading soybean, soybean meal, sugar, beef, poultry, corn, cotton, pork, coffee, and citrus producer and exporter. Since 2022, these commodity prices have reached multi-year and, in some cases, all-time highs.
Agricultural commodity production tends to be labor-intensive, with local costs in local currency terms. Therefore, a rising Brazilian real against the U.S. dollar pushes output expenses higher, putting upward pressure on prices and inflationary pressures. A rising real against the U.S. dollar means higher raw material prices.
A higher real could support Brazilian stocks- EWZ is the Brazilian stock ETF product
Meanwhile, as higher commodity prices push the real higher against the U.S. dollar, it will likely increase the earnings of Brazilian companies. The iShares MSCI Brazil ETF (EWZ) owns shares in the leading Brazilian stocks that trade on U.S. and foreign exchanges, including a significant holding in Petrobras (PBR), the Brazilian energy giant.
At $31.07 per share on August 14, EWZ had nearly $5.2 billion in assets under management. EWZ is a highly liquid ETF that trades over 20.7 million shares daily and charges a 0.58% management fee. The $2.78 annual dividend translates to an attractive 8.95% yield.
A rising real leading to growing corporate profits and the high dividend yield could support EWZ and cause the ETF to break out from a multi-year bearish trend.
The chart shows the pattern of lower highs and lower lows from the 2008 high to the 2016 low. EWZ made a higher low in March 2020, and while it has made lower highs since June 2021, it has been consolidating. The April 2022 $39.59, June 2021 $42.05, and January 2020 $48.48 highs are upside targets and technical resistance levels. A rising real and Brazil’s participation in a successful BRICS currency could lead to a break out in the real versus the U.S. dollar and the EWZ ETF product.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
