Brazilian Real Is Bearish on Low Commodity Prices

Brazilian Real Is Bearish on Low Commodity Prices
March 14, 2016

Brazil’s economy is the largest in Latin America. The country has vast offshore oil reserves in the Western Hemisphere and also holds the second largest iron ore reserves in the world. Furthermore, the country is the second-largest producer of soybeans and third largest producer of corn. In spite of this, the economy of Brazil, the fifth largest country geographically, contracted 3.8% in 2015 – the deepest decline for the country in the past 25 years. The Brazilian Real had lost about 55% of its value since 2011 and the USDBRL closed at 3.5840 on Friday.

Fundamentally, the country derives more than 50% of its export revenue from raw products. Iron ore, which hit a high of $191.90 per ton in 2001, is currently trading at about $58 per ton. But for the price rise of 19% last week, the price of iron ore would remain far lower at $40 per ton. As far as agro-commodities are concerned, the price of soybeans had fallen to USD 865 cents per bushel in 2016, from a high of USD 1800 cents per bushel in 2012. Similarly, the price of corn, which touched a high of about USD 850 cents per bushel in 2012, currently remains depressed at USD 353 cents per bushel. With few signs of increase in demand, the price of iron ore, soybeans and corn is expected to remain range bound with bearish bias in the short-term.

The country suffers from a junk credit rating and scary double digit inflation. The low price of crude had eroded the market capitalization of Petrobras by more than 75% in the last seven years. The budget deficit is expected to be 9.45% of the GDP. Furthermore, Brazil has not set aside any money to service the debt. The seriousness of the situation can be understood by the fact that the interest rate in Brazil is about 14.5% per annum. Thus, 8% of the country’s productivity is required to service debt. Of the total loans offered by banks, 55% of them were subsidized to support business establishments. Flexible labor laws and considerable reduction in bureaucracy can only result in restoring confidence among investors. Thus, fundamentally, the Brazilian currency remains weak. So, traders should only look for an opportunity to buy USDBRL in decline.

Technically, the USDBRL currency pair has formed a bullish AB=CD harmonic pattern. Thus, traders can expect an uptrend in the currency pair in the coming weeks.

A long position can be taken by a forex trader at the current levels. Trade should be closed, if the USDBRL pair falls below 3.4800. Profit for the long position should be booked between 3.73 and 3.78 levels.
USD BRL Technical Analysis - 14th March 2016

Purchasing a one touch call option contract can be safest bet as far as a binary options trader is concerned. The expiry date can be chosen between the middle and the end of April. A strike price of about 3.70 would be ideal for the call option contract.



Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world

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