A Different Year, Same Brazilian Politics: It’s been nearly a year since Brazilian President Dilma Rousseff was impeached, and the country is now facing another presidential crisis. Late Wednesday afternoon a major Brazilian newspaper ran a story of how the current president Michel Temer had been recorded approving a cover up scheme involving bribes the form speaker of the lower house of Congress (currently in prison). When made aware that the former speaker was being bribed to stay silent, Mr. Temer is alleged to have approved the bribes and encouraged them to continue. Following the story release, the Brazilian stock market fell more than 9% on Thursday and the Brazilian currency was was off more than 8% against the US Dollar as world investors were quick to dump Brazilian related assets.
Investors Dump Brazilian Assets: As the impeachment of last year showed, removing a Brazilian president is a lengthy process, and the current case is tied back to the last impeachment. In order for Congress to initiate proceedings the speaker of the lower house (and President Temer’s ally), will need to approve the impeachment requests. The whole process is likely to be messy and insestual (like the last impeachment). CME Brazilian Real futures capture a very small percentage of total BRL/USD transactions, but does offer some insight as to how traders are positioned. The chart shows the latest Traders in Financial Futures data from the CFTC. Note that Leveraged Funds (CTA’s and CPO’s) had held a record net long position in mid February, but have been steadily liquidating over the last 11 weeks. Asset managers such as pension funds, endowments, and mutual funds were also net long the Brazilian currency.
Brazilian Farmers Cheer On Weaker Currency: The fallout from the political uncertainty and moves in financial markets were felt directly in the US soy futures markets today. July soybeans gapped lower at the overnight open and fell sharply. The chart plots spot CBOT soybean prices in both US and Brazilian currencies. Up until recently, US farmers have seen prices that were well above last year. Yet, due to a stronger currency, Brazilian farmers have mostly seen lower prices and have been slow sellers of the old crop harvest. An 8% currency swing in a single day offered Brazilian producers to hedge production at the best price in nearly 3 months. Political uncertainty is likely to keep the Brazilian currency under pressure, and even weaker forward currency rates could encourage acreage expansion for 2017/18. It’s a weaker Brazilian real into September seedings which poses the most risk for US farmers.