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April 19, 2016

Brazilian Currency Fluctuating Wildly on Impeachment Prospects

The value of the Brazilian currency has fluctuated wildly in recent weeks with every news cycle concerning the potential impeachment of the Brazilian President. We have said many times in the past that the currency exchange rate is often times more important to Brazilian farmers than the actual international price of commodities. Going forward, I think that is now truer than ever.

Brazil's Lower House of Congress voted on Sunday to proceed with impeachment against President Dilma Rousseff. The measure will now be taken up by the Brazilian Senate. Whatever happens in the Senate, it will have a profound impact on the Brazilian currency.

If Dilma is eventually impeached, there are estimates that the Brazilian currency could trade as strong as 3.10 to the dollar immediately after impeachment. If Dilma survives in office, there are estimates that the currency could weaken to as much as 4.20 to 4.50 to the dollar.

The idea that the currency would strengthen if she is impeached is counter intuitive to me. The logic is that anyone other than Dilma would be better for the economy, I understand that. My concern is that if she is impeached, there would be a period of tremendous uncertainty while a new administration takes shape. The new administration would have to appoint new ministers, they would need to formulate new economic policies, and new alliances would need to be formed in the Brazilian Congress.

Additionally, you can bet your bottom dollar that if Dilma is impeached, the members of the Worker's Party and their coalition partners would do everything in their power to thwart any effort in Congress to undo any of Dilma's (or Lula's) policies. Besides, just changing presidents does not change the underlying structural problems in the Brazilian economy. My guess (and believe me it is just a guess) is that if she is impeached, there will be a temporary strengthening of the currency, but eventually it will continue to weaken as the economic reality once again takes hold.

Brazil is not going to emerge from the current economic morass any time soon. There have been two years of shrinking GDPs and even the most optimistic economists expect zero or minimal growth in 2017. I am no economist, but I think the Brazilian economy will not begin growing again for several more years and it won't return to robust growth until the downturn in commodities such as grains, minerals, and oil break out of their current down cycle.