Porto Alegre, July 4, 2023 – The rains returned to the entire US Midwest in the last week of June and suggest a July with good indexes for the critical period of crops of corn. A drought situation of almost forty days that will mark the average yield of this 2023 crop. Besides the climate scenario, always tense, the first update on the planted area was projected by the market with some stability for corn and an increase for soybeans. The report brought something quite different from the expectations of consultancies, brokerage houses, and, the newest star in the market, agricultural analytics companies. The third-largest US corn area and the reduction in soybean planting were not suggested by any local company, which made the information even more relevant to the market. Besides being fully bearish for corn, it also reverses the scenario for soybeans to a price support bias. For Brazil, which is reaping its biggest crop on record, the information does not come at a good time, and we will need positive premiums or exchange rate recovery to balance the pressures on prices on the Chicago Board of Trade (CBOT). The next key point is the July supply and demand report and the adjustments to be made to the USDA’s forecast for US production.
As the data on the economic data left the US economy away from a recession, markets were cheered, on the one hand, by the combination of the decline in inflation with growth in activity. On the other hand, the figures meet the most orthodox expectations that there is a need for a new interest rate hike to put more pressure on inflation and take it to the annual target of 2% later this year. Today, local inflation is at 4% YoY.
This attempt of bias toward a new interest rate hike will depend more on the June inflation index, to be released in the second week of July, than on other economic indicators. The excess of economic activity still seems to limit the maintenance of cash deposits in banks, and this generates an additional concern in the financial system. However, after the stress test carried out by the Fed, markets seem to have reduced this tension about systemic risk.
So, we return to the key theme of attention, that is, the June inflation in the United States, the Fed’s decision on interest rates in July, and the continuation of what we have already shown in our previous evaluations. The dollar index continues to inhibit a devaluation version of the dollar against other currencies, given this new bias given by the market for the July Fed meeting. Above 101 points and it will only lose this floor when the central bank really points to a reversal of the yield curve.
Meanwhile, the real has some support above BRL 4.70/dollar and also depends on a decline in internal interest rates to resume levels above BRL 5.00. For the time being, high interest rates keep the Brazilian economy stabilized and with capital inflows, which sustains the overvaluation of the real. However, political pressure to reduce interest rates remains intense, including an attempt to change the presidency of the Central Bank. This is the difference between an independent central bank with its own rules and a politically controlled one. High interest rates satisfy the balance of the Brazilian economy in times of high international interest rates and high inflation. With another month of primary deficit, it remains difficult to cut interest rates without the risk of bringing back inflation.
With the Brazilian inflation target maintained at 3% for 2024 and 2025, monetary policy may remain austere as long as the central government maintains the posture of creating primary deficits rather than surpluses. Only a positive view of the public debt can hold back interest rates in a balanced way. The acceleration of the decline in interest rates from now on could cause different movements in the exchange rate.
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