Porto Alegre, April 23, 2024 – The global political environment continues to create tensions in the global environment, now with Israel’s military retaliation against Iran. At first, the retaliations looked like demonstrations of strength and justification of their actions toward their populations, but without clearly signaling that the region wants a war of large proportions at this time, despite the existing tensions. The movement did not cause a major surge in oil, with no consequences for commodities or the dollar. The dollar remained firm abroad due to the economic situation as well as to the chance that interest rates would not decline in 2024 as the Central Bank intended. The exchange rate in Brazil broke the band that had been seen since July 2023, supported by errors in the internal economic policy, putting public accounts at historical risk and without a recovery bias due to the lack of spending cuts. So, the exchange rate is the only positive point for domestic prices of commodities in Brazil. In the case of corn, enough to maintain export parity at BRL 57/60 in Brazilian ports, without offering consistent changes to the internal situation, which will require exports of at least 40/45 mln tons this business year. For this reason, the domestic market will need to find export parity if it wishes to have a flow channel along with chances of upward movements by the end of the year. Otherwise, the retention of second-crop corn will generate a more serious logistic problem for the start of the 2025 season.
A week with plenty of global and internal volatility. Initially, the release of the Beige Book by the Fed (US central bank), which highlighted the risk variables and the most positive ones for the economy in the short term. The Fed’s chair said that the robustness of inflation during the first quarter introduced new uncertainty about when and whether the central bank would be able to cut interest rates later this year.
The recent data have not clearly given us greater confidence that inflation is progressing toward the Fed’s objective and instead indicate that it will likely take longer than expected to achieve that confidence. The chair suggested that the Fed will likely keep interest rates at their current level, the highest in 23 years, for an even longer period if inflation continues above the central bank’s 2% target. He also indicated he would be prepared to cut rates if the economy were slowing down sharply, a situation that is not yet real. “At this time, given the strength of the labor market and the progress in inflation to date, it is appropriate to give the restrictive policy more time to work.”
This US economic indicator again strengthened the dollar to 106 points in the dollar index and brought general changes to emerging currencies. The real had been previously affected by the initial move. However, the real above BRL 5.20/dollar has a direct and relevant variable, the national public accounts. After the government decreed a change in context for the fiscal deficit for the year at 0.25% of GDP, that is, another year of deficit in public accounts, a race has begun for the National Congress in an attempt to bring back projects for tax increases and some legislative mechanisms that would bring more expenses to the government. As the government does not establish a spending cut, the attempt continues to be the increase in the tax burden to make ends meet.
This model, as we have already pointed out, has limits for the economy and could put Brazil into an accelerated recession. The financial market seems to have lost hope in a medium-term correction bias and started to establish a change in the exchange rate level to adjust the new record of public debt to the real at a new balance point. With exchange rate arbitrage reaching “zero” and no chance of cutting interest rates abroad, the Monetary Policy Committee (Copom) will not be able to reduce interest rates next May. This movement seems very clear at this point. An interest rate cut would put arbitrage at a negative point, and capital flight might grow. Will Copom risk this move? Does it want an exchange rate at a higher level? Is there no hope of a correction in public accounts anytime soon? These are issues that need to be made clear to the market in the next thirty days.
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