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January 30, 2018

Brazil's Financial Markets responded positively to Lula's Conviction

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

The financial markets in Brazil responded favorably to the reaffirmation of Lula's conviction. The stock market strengthened and the Brazilian currency strengthened compared to the U.S. dollar. The financial markets were concerned that if Lula returned to the presidency, he would undo many of the austerity measures that have recently been put in place.

After the appeal's court vote last week, it is believed that President Temer will now be more able to push pension reforms through the Brazilian Congress that he feels are necessary for the Brazilian economy. A vote on these reforms is scheduled for later in February, but their fate is uncertain. These reforms are very unpopular and there have been demonstrations against them, so it remains to be seen if Congress approves these measures.

All this has resulted in a stronger Brazilian currency, which is bad news for Brazilian farmers. The Brazilian real closed last week below 3.15 to the dollar and Monday it traded in the range of 3.16 to the dollar. Last week marked the fifth consecutive week in a row that the currency had strengthened. Last week it strengthened 1.9% and over the last five weeks, it has strengthened 5.8%.

A strong local currency usually results in lower domestic grain prices and that is exactly what happened in Brazil last week. The stronger Brazilian currency countered some positive price gains on the Chicago Board of Trade. Most observers feel the currency will continue to be volatile until the political situation becomes clearer in Brazil.

In the meantime, a stronger Brazilian currency may result in slow farmer forward contracting and slow farmer selling after the soybeans are harvested. This could result in a few more soybean exports from the U.S.