On December 29, 2022, in an article on The Brazilian Real and Commodities, on Barchart, I wrote:
As we move into 2023, the Brazilian real’s level against the U.S. dollar could take the center of the stage if it moves out of the current trading range and breaks above the $0.21 level or below the $0.17 level.
Many issues face the Brazilian currency in the coming year. President Lula’s Democratic-Socialist ideology will impact the economy, but the government and populace remain divided as the election was close.
On December 29, the Brazilian real versus the U.S. dollar exchange rate was at the $0.19087 level. Meanwhile, three of the four soft commodities produced in Brazil were at higher prices on May 30, 2023, than in late December.
The exchange rate remains in a tight trading range
The Brazilian real reached a $0.6517 high against the U.S. dollar in July 2011 and dropped to a $0.16756 low in May 2020. The real rose to its high during the last secular rally in the commodities asset class and low when commodity prices reached bottoms at the start of the global pandemic.
The chart illustrates the price action in the foreign currency exchange relationship. After reaching the 2020 low, the real has traded in a range from over $0.17 to below $0.22. The stable range not far above the low indicates the real reached a significant bottom.
Brazil plays both sides of the geopolitical divide
The change in Brazil’s political leadership from President Bolsonaro to President Lula reflects a shift in ideology from a more business-friendly environment to socialist democracy.
Meanwhile, a substantial change in the geopolitical landscape with the bifurcation of the world’s nuclear powers has put Brazil in the middle of the growing tensions between the U.S./Europe and China/Russia. As a BRICS country, Brazil has an alliance with Beijing and Moscow, but the country has also maintained relations with Washington, DC. The growing trend toward a BRICS currency that could shake the U.S. dollar’s dominance as the world’s reserve currency puts the Brazilian economy and its foreign exchange instrument in a position where it is on both sides of the geopolitical gulf.
Three of four soft commodities have rallied over the past months
Brazil’s economy is dependent on its exports and raw material production. While the South American country produces many commodities, the weather and climate make it is leading agricultural producer. The soft commodities sectors include sugar, coffee, cocoa, cotton, and frozen concentrated orange juice that trade on the Intercontinental Exchange (ICE) futures market. Brazil is a top producer and exporter of sugarcane, Arabica coffee beans, cotton, and oranges. Since the end of 2022, sugar, Arabica coffee, and frozen concentrated orange juice futures have rallied, while cotton has remained stable.
The chart shows that nearby July cotton futures at 84.80 cents per pound on May 26 were slightly higher than the December 30, 2022, closing price at 83.38 cents. Cotton is the only Brazilian soft commodity that has not substantially rallied over the past months.
Nearby July world sugar futures #11 moved from 17.98 cents at the end of 2022 to the 25.37 cents per pound level on May 26, a 41.1% gain.
Arabica coffee bean futures for July delivery rallied from $1.6660 on December 30, 2022, to $1.7630 per pound on May 26, a 5.8% rise.
Meanwhile, July frozen concentrated orange juice futures reached a new record $2.9590 high on May 24 and have rallied from $1.9580 on December 30, 2022, to $2.8380 per pound on May 26, a 44.9% increase.
The rise in soft commodity prices over the past months has increased Brazilian tax revenues and is generally bullish for Brazil’s economy.
The levels to watch in the real versus the dollar exchange rate
Inflation and rising commodity prices support Brazil’s economy and currency. The long-term chart dating back to 2009 highlights technical support at $0.16756 and resistance at $0.21773. From a short-term perspective, the currency relationship has been making higher lows and higher highs since the November 2022 $0.18194 low.
The short-term chart shows the bullish price action over the past months. Resistance is at $0.20466, with support at $0.18734. The trend will remain bullish if the real versus the dollar relationship remains above $0.18734.
A BRICS currency could cause the real to move higher
Aside from commodity prices impacting the Brazilian real’s value, moving towards a BRICS currency that challenges the U.S. dollar for cross-border payments and world trade could lift the real against the U.S. dollar in the foreign exchange market. As a growing number of countries use non-dollar assets for payments, the real will likely benefit. Moreover, if the BRICS countries establish a united currency, like the euro, it could weigh on the dollar’s position in the global financial system.
The Lula administration is playing both sides of the geopolitical fence, which could be very bullish for the real. Meanwhile, South America’s leading currency will remain highly sensitive to commodity prices. A rising real could put upward pressure on prices because it increases the local production costs, putting upward pressure on prices of commodities coming from Brazil.
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.
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.
