Porto Alegre, March 14, 2023 – The United States Department of Agriculture (USDA) report had promised a neutral bias for market conditions in March. Little change in the condition of US stocks and some cut in Argentina’s crop were expected. At first, USDA raised stocks higher than expected due to the cut in the forecast for exports. The symptom is that Brazil has met more than the expected world demand for this first semester with its exports in 2022. Besides, the Argentine cereal exchanges, as well as SAFRAS & Mercado, started to cut even more the already reduced corn and soybean production in the country. After the frosts, crop conditions have deteriorated, with a strong rise in temperatures and only spotty rainfall. The defining phase of production for corn and soybeans accentuates the Argentine agricultural chaos of 2023. The Argentine government will only release its numbers in April, which can be contrasting with those from the private sector. Meanwhile, the Brazilian summer crop is being reaped, and producers accentuate their bullish vision for soybeans, due to the Argentine crop failure, and sell corn. All this holds prices in the Brazilian domestic market even with the reasonable delay in the planting of the 2023 second crop.
This week will have important information for the unfolding of the 2023 interest rate curve in the United States. The February inflation will be released, and the number needs to bring some optimism about the effects of higher interest rates on prices. The January inflation accumulated 6.4% in twelve months, against 6.5% in 2022. Employment, income, and demand seem to provide inertial support for core inflation. For this reason, the February data are important, and it would be optimistic if they brought an accumulated figure below 6% in twelve months, with the inflation curve still falling. If inflation remains above 6%, the market may bet on more interest rates ahead.
On the 21st and 22nd of this month, the Fed decides once again on the prime interest rate, and the consensus is already for an increase of at least 0.25%, maintaining the bias of another high in the next meeting. The only point that can put a brake on this movement of continuity is the sharply lower inflation in February.
The effect of this context of interest rates against inflation is registered by the dollar index, which rose in February, after a long period, and showed the appreciation of the dollar against the risk of additional interest rate highs. The index reached 105 points, rising in 2023, showing that only a falling inflationary curve can balance interest rates and currency. Everything indicates that the rate of interest rates so far has not been sufficient for proper inflationary settlement, and the February index should be fundamental for that.
This external movement has kept the real in Brazil close to BRL 5.20/dollar. There is no valuation slack due to the external picture. If there is a new high in the dollar index abroad, the exchange rate in Brazil can test higher levels. What continues to aggravate the Brazilian situation in 2023 is undoubtedly the deterioration of the economy’s safety parameters. The expenditure ceiling, control of public spending, interference in state-owned companies and their pricing policy, taxation on exports, and, mainly, aggressiveness against the independent Central Bank are unfavorable references for the Brazilian economy. Besides, attempts are being made to manipulate the monetary structure politically, with visions that the inflation ceiling needs to be higher and that interest rates need to fall, regardless of any other indicator. This mismatch between public spending and the deterioration of economic parameters caused major changes, including political ones, in 2016/17, and it would be catastrophic for the country to have a misalignment between monetary policy and reality. This misalignment could put all risk protection of the financial market back to the exchange rate, leaving long-term government bonds, and worsening the debt financing situation.
In the short term, then, inflation in the United States and the Copom’s attitude in Brazil regarding the interest rate curve will define the path for the exchange rate this month.
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