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The commodity premium the dollar was paying

Episode

The extreme

It looked like demand. The ratio between commodities measured in reais and the Ibovespa was stretched to an extreme that, seen from afar, suggested the world had gone back to fighting over Brazilian ore and oil. It had not. What was expensive was the dollar — and the commodity in reais was merely wearing it. When the currency took a pause in October 2015, the premium began to deflate. In numbers: the Commodities (R$)/IBOV ratio retreated from 2.60 to 1.94 of deviation while the dollar eased from R$ 3.9065 to R$ 3.8801, and domestic appetite jumped to 82.5.

What happened next

The disguise fell in stages. In January 2016, the dollar crossed the four-reais mark for the first time, closing at R$ 4.0524, and commodities measured in the index sank to -2.16 of deviation — the opposite of the strength the premium appeared to show. In April came the final proof: with the real rallying to R$ 3.5658, commodities in nominal currency rose vigorously, but the same commodities measured in reais fell to -0.89 of deviation. The difference between the two readings had a name, and the name was the exchange rate. Only in October 2016, with the dollar at R$ 3.1858, did raw materials genuinely lead the structure again, crossing to +1.13.

What did not happen

The 2.60 extreme was not appetite for commodities, and anyone who read it that way had the wrong thermometer. Nor was it a floor: the ratio did not stop at 1.94 — it kept falling until it turned negative months later. And October's currency relief consolidated nothing; the dollar broke through its own edges again in January before easing for good. The retreat of the premium did not announce a commodity recovery. It announced only that the currency had stopped, for one month, getting worse.

The honest verdict

The commodity in reais is a thermometer of the exchange rate dressed up as a raw material. In October 2015 it read a fever — but the fever was the real's, not global demand's. The reading was right to treat the extreme as an anomaly bound to deflate; wrong was whoever confused the high number with the strength of what Brazil exports.

Continue reading: Commodities in reais · The commodity leap that was the exchange rate · The commodity that only yields in reais →

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Characters: Commodities · Dollar