In 2022, commodity prices continue to rise because of many factors. The recent upward trajectory of the real has a cause-and-effect impact on inflation. Higher commodity prices support Brazil’s currency, and a rising real only pits more upward pressure on raw material prices.” On February 24, the real was at the $0.19515 level against the US dollar. Since then, the Brazilian currency has made higher lows and higher highs, even though the US dollar exploded to its highest level in two decades.
Inflation that pushes raw material prices higher will likely continue to push the real high over the coming months. The Brazilian real is a commodity currency as the Brazilian economy thrives during raw material bull markets.
Global inflation is bullish for Brazil’s currency, given the country’s raw material production. In 2022, the US Federal Reserve has become vigilant in its quest to address inflationary pressures after a series of consumer and producer price index data that shows the economic condition is at the highest level in over four decades.
While the Fed can address the inflationary roots of seeds planted in 2020 when liquidity, historically low-interest rates, and government stimulus programs caused the economic condition, events in 2022 present a unique challenge. Russia’s invasion of Ukraine, sanctions on Russia, and Russian retaliation have caused distortions in food, energy, and other raw material prices.
While central bank monetary policy tools address the economy’s demand-side, supply-side issues caused by the first major war in Europe and geopolitical tensions are another story. The Fed and other central banks are not equipped with tools that address the supply side.
Sanctions on Russia enhance Brazil’s position as a commodity supermarket to the world- An election is on the horizon
Brazil is one of the BRIC countries, along with Russia, India, and China. The position has caused the Brazilian government to take a neutral stance on sanctions and other issues surrounding Russian aggression. Moreover, China and Russia’s “no-limits” agreement has caused Brazil and India to avoid backing the US and Europe or China and Russia in the global conflict. However, Brazil’s vast commodity product creates an opportunity to benefit from rising raw material prices and supply areas of the world where political export or import bans exist.
In October, Brazilians will go to the voting booths to decide if far-right-wing and controversial President Jair Bolsonaro will serve another term leading South America’s leading economy. The election could cause lots of volatility in the real versus the dollar foreign currency relationship.
Levels to watch in the Brazilian real versus the US dollar currency relationship
Bull markets rarely move in straight lines, and the upcoming Brazilian Presidential contest could cause lots of price variance in the real over the coming months. However, the global inflationary pressures will continue to support Brazil’s commodity production, leading to higher corporate profits and government tax revenues.
Brazil is a significant commodity producer and exporter, and Russia’s issues only make the global dependence on Brazilian exports more substantial. We can expect the bullish trend to continue with the bull market in the commodities asset class.
BRL/USD Long (Buy)
Enter at: 0.2091