The Brazilian real is in a strong downward trend against key currencies like the US dollar and the euro as investors focus on the upcoming central bank decision. The USD/BRL exchange rate has risen in the past seven consecutive months and is trading at its highest point since January 3rd.
Corn and soybean prices
The Brazilian real has tumbled because of the falling prices of some of its key exports. The Teucrium Corn Fund (CORN), which tracks the price of corn, has dropped by 16% this year and by 26% in the past 12 months.
Similarly, the Teucrium Soybean Fund (SOYB) has dropped by 22% in the last 12 months and is hovering at its lowest point since January 2022.
SOYB vs CORN prices
These commodities have dropped because of the higher-than-expected supplies in key countries like Russia, Ukraine, and the United States.
The most recent US WASDE report showed that US production will rise by 240 million bushels this year. The department expects that the average farm price received by producers will be $4.30 per bushel, down from the previous estimate of $4.40.
Soybeans are doing well, with production expected to drop by 15 million bushels in the United States. The USDA estimates that the average soybean price will be $11.10 this season, down by 10 cents.
Brazil is affected by low corn and soybean prices since they are among its biggest foreign exchange earners. Sugar, another top export, has dropped by over 33% from its highest point in 2023.
Their low prices has been offset by higher energy prices as Brent and West Texas Intermediate (WTI) have remained above $80 for the most part of the year.
Brazil central bank cuts
The USD/BRL exchange rate has also risen because of the ongoing divergence between the Federal Reserve and the Brazilian central bank.
In the United States, the Federal Reserve has left interest rates unchanged between 5.25% and 5.50%, where they have been for months. This view happened as the country’s inflation has remained stubbornly high and above the Fed’s target of 2.0%.
In Brazil, however, the central bank has been a bit dovish since last year. It was among the first emerging market currencies to start cutting interest rates in 2023. Its first cut happened in June when interest rates stood at 13.75%. Since then, it has brought rates to 10.50.%.
These cuts happened as inflation dropped from the post-pandemic hgh of 12% to a low of 3.16% in May 2023. Recently, however, inflation has moved back up again and sits at 4.23%.
Therefore, analysts expect that the central bank will leave rates unchanged at 10.5% later this week. It will also point that rates will remain higher for longer to deal with the ongoing inflationary trends.
Federal Reserve rate decision ahead
The next important USD/BRL news to watch will be this week’s Federal Reserve interest rate decision scheduled for Wednesday.
This will be an important meeting since the Fed will set the tone on what to expect later this year. Most economists expect the Fed will leave interest rates unchanged between 5.25% and 5.50% in this meeting.
Nonetheless, the bank has an incentive to point to rate cuts later this year, especially in September. Inflation, especially core inflation, has dropped sharply in the past few months. The core Personal Comsumption Expenditure (PCE) data dropped to 2.5% in June this year.
These numbers are moving towards the Fed’s 2.0% target. At the same time, the labor market has softened a bit in the past few weeks. The unemployment rate has risen to 4.1%, its highest point since 2021. The Bureau of Labor Statistics (BLS) will publish the latest non-farm payrolls (NFP) data on Friday.
In a recent statement, Jay Powell noted that the Fed was now mostly focusing on the labor market. Additional numbers have shown that the economy was softening, as Alan Binder noted in a WSJ opinion piece.
USD/BRL technical analysis
USD/BRL chart | source: TradingView
Turning to the daily chart, we see that the USD to Brazilian real has been in a strong bull run in the past few months. It has risen from the July low of 4.69 to 5.66. In this period, the pair has remained above the key resistance point at 5.50 and all moving averages.
However, the pair has also formed a dangerous chart pattern known as a double-top at 5.7 and whose neckline is at 5.37. In most cases, this pattern is a highly bearish one. Therefore, the USD/BRL pair will likely have a bearish breakout as sellers target the key support level at 5.50.
However, more upside will be confirmed if the pair rises above the key resistance point at 5.70. If this happens, it will rise to the next point at 5.75.
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