Porto Alegre, June 26, 2026 – During another week marked by tensions surrounding the two wars currently facing the world, the central banks of the United States and Brazil announced their monetary policy decisions. The outcome was largely in line with expectations, with no major surprises, namely an interest rate cut in Brazil, accompanied by a reduction in international interest rate arbitrage and a depreciation of the exchange rate. The question now concerns the impact of the exchange rate on domestic prices and whether there is room for some improvement in the domestic market based on port prices.
For the time being, Safras & Mercado has revised its production estimates, with another reduction for Goiás and Minas Gerais due to drought conditions and virtually no rainfall during May. Even so, production is still expected to approach 140 million metric tons thanks to good production in the remaining states. This leads to the need to export between 35 and 40 million metric tons this year, although exports are getting off to a very slow start with the beginning of the second-crop harvest. Port prices remain weak, while the exchange rate has provided only limited improvement, creating an unfavorable environment from the producer’s perspective. Despite strong domestic demand and significant losses in Goiás, surplus supplies remain, and exports are the variable capable of changing this price outlook throughout the second half of the year.
The week also brought two developments involving the ongoing wars that continue to affect commodity markets. The first was another attempt to reach a definitive agreement, which ran into renewed tensions in Lebanon and prevented the agreement from being signed over the weekend. Perhaps it will happen next weekend. The second was the escalation of tensions between Ukraine and Russia, with major attacks now taking place inside Russia, potentially creating another traumatic environment for the region. It is important to remember that this region is responsible for key commodities such as wheat, sunflower oil, corn, petroleum products and fertilizer exports. A possible closure of regional ports could trigger new price movements across these commodity markets.
While markets were digesting these developments, the U.S. Federal Reserve held its first meeting under the leadership of its new Chairman, with the direction of the new monetary policy serving as the central focus. Initially, the Fed confirmed expectations by leaving interest rates unchanged while continuing to monitor economic indicators going forward. However, with new leadership in place, markets had expected a somewhat different approach. At this point, the Fed will continue to treat inflation risks as its top priority. In other words, if interest rate hikes become necessary, they will occur regardless of other factors.
The market had been expecting the first U.S. interest rate increase to take place in December. Those expectations have now shifted to September, which would mark the first rate hike under the new Fed leadership. Even the sharp decline in oil prices during the week was not enough to ease these expectations, given that producer-level inflation has reached 6.5% over the past twelve months and could eventually spill over into consumer inflation. This creates a different environment that will depend on a significant easing of inflationary pressures in order to avoid another cycle of interest rate increases in the United States.
Consequently, the U.S. Dollar, as measured by the Dollar Index on the New York Stock Exchange, once again tested the 100-point level, which has served as the upper boundary of its trading range over the past year. A breakout above this level could push the index toward 102 points, initiating a new movement for the U.S. dollar with consequences for emerging-market currencies. Employment data due next Friday and the June inflation report, to be released during the second week of July, will determine whether this stronger bias will materialize.
Brazil’s Central Bank also announced its interest rate decision. As expected, Copom ignored domestic inflationary signals—which extend well beyond oil prices—and cut the Selic benchmark rate by 25 basis points. This provides yet another indication that, until the elections, benchmark interest rates will likely continue to decline regardless of other economic factors. While the government continues paying the highest real interest rate in the world to roll over its increasingly large public debt, Copom is attempting to mitigate these effects by lowering the benchmark rate.
The result of this monetary policy is a reduction in Brazil’s interest rate arbitrage to below 4%, that is, the spread between foreign and domestic interest rates after transaction costs. Although this still represents an attractive arbitrage opportunity, it is important to remember that in both 2023 and 2024 the Central Bank drove this arbitrage into negative territory, eliminating positive capital inflows and pushing the exchange rate to BRL 6.30 per U.S. dollar. Therefore, domestic monetary policy that fails to take external conditions into account could once again create a fragile exchange-rate environment. A breakout above the BRL 5.15 resistance level could quickly move the exchange rate into the BRL 5.15–5.30/USD range. While this would not yet represent an extreme level, the Brazilian real should never have appreciated toward BRL 4.90 per dollar, and its current correction is likely to accelerate inflation.
