The predominant trend in dollar-based soft-commodity prices remains down and is unlikely to reverse until the Brazilian real sustains a recovery. A primary driver of coffee and sugar prices may be Brazilian pension reform. Oversupplied cotton, the strong dollar and trade tensions add headwinds to the sector.
Brazilís real driven by external backdrop, but politics matters
The highly-liquid Brazilian real is sensitive to external factors (U.S. rates, commodity prices, risk aversion). And it eventually decouples in the presence of country-specific factors (policy/reform outlook, as in 2018 elections). An exchange rate of around 3.70 reais per U.S. dollar seems consistent the current external backdrop and with the countryís fundamentals ó assuming pension reform passes. Failure to approve a sufficiently strong pension reform could weaken the BRL beyond 4.50 per U.S. dollar, in our view.
The BCB does not target any level for the Brazilian real, but it tends to intervene in the market (mostly via derivatives) when faced by sudden, sharp movements. We expect the new BCB Board to unwind part of its USD 68 billion short future dollar position, conditions permitting
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