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The commodity jump that was the currency — April 2016

Episode

The extreme

Raw materials came back into fashion on the exchange, and the number looked unambiguous. But there were two ways to measure them, and they disagreed. Against the index in nominal currency, commodities surged; measured in reais, they retreated in the same month. The gap between the two readings had a single name: the dollar. It was the same commodity telling two stories — one of appetite, the other of a stronger currency shifting the ruler. In numbers: the Commodities/IBOV ratio rose from −0.85 to +0.24 of deviation in four weeks, crossing to the positive side for the first time in months, while the ratio in reais fell from −0.54 to −0.89. The dollar closed at R$ 3.5658, below March's R$ 3.70. The intermarket advanced from 43.29 to 54.37 — from moderate risk-off to neutral, the fourth month of improvement.

What happened next

The currency won the debate. In July 2016 the real kept appreciating — the dollar at R$ 3.2756 — and commodities in reais sank further still, from −1.30 to −2.13 of deviation, while the cyclicals stretched to +2.87. In October 2016 appetite turned selective: banks and raw materials led together and the intermarket climbed to 68.66, moderate risk-on, with the dollar firmer at R$ 3.1858. The appreciation was no hiccup; it lasted. By April 2017 the currency still printed R$ 3.1362.

What did not happen

The dollar did not stop falling. The question April left hanging — "how much of the commodity strength was the currency?" — never got the neutral answer that depended on the currency stabilizing: the real appreciated from R$ 3.5658 to R$ 3.1362 over the following year. And it was not euphoria. Despite Ânima in extreme optimism (94.1), the Perene Risk Index stayed in neutral territory (48.6) — the declared confidence was not ratified by allocation. Appetite for commodities in reais, for its part, never confirmed: it worsened.

The honest verdict

The reading did the hard part: it separated the nominal illusion from the real move and pointed to the currency as the author of half of what the prices appeared to do on their own. What it could not say in real time was which of the two theses would win. Only the months ahead revealed that the ruler had shifted more than the load.

Continue reading: Commodities measured in reais · The dollar as a regime thermometer · The surface thaw of the intermarket →

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Characters: Dollar · Commodities