Key Moments
- The Brazilian Real (BRL) underperformed despite a generally favorable backdrop for FX carry trades.
- A bank’s downgrade of Brazilian equities and a new presidential poll showing President Lula extending his lead weighed on BRL.
- ING’s Chris Turner expects high implied yields and Brazil’s net energy exporter status to support BRL, with USD/BRL seen unlikely to move through 5.22 on domestic news alone.
Election Developments Pressure the Real
According to ING’s Chris Turner, the Brazilian Real struggled relative to other high-yielding currencies in a broadly supportive environment for carry trades. The currency’s setback followed two key developments: a sell-side bank cut its stance on Brazilian equities from overweight to neutral, and a fresh opinion poll indicated President Lula increased his advantage ahead of presidential elections scheduled for early October.
Turner describes this session as the first time this year that domestic political dynamics have had a clearly negative impact on the Real.
Carry Appeal and Energy Status Offer Support
Despite the political headwinds, Turner maintains a constructive stance on the currency’s underlying support. He highlights the appeal of BRL carry, pointing to “13.4% implied yields through the one-month non-deliverable forwards” and notes that Brazil’s role as a net energy exporter should help sustain investor interest in the currency.
| Factor | Detail |
|---|---|
| Implied yield (1M NDF) | 13.4% |
| Equity call by sell-side bank | Downgrade from overweight to neutral |
| Political development | New poll shows President Lula widening lead ahead of October elections |
| Key USD/BRL level | 5.22 |
Positioning, Dollar Dynamics, and USD/BRL Levels
Turner acknowledges that positions in BRL are likely heavily skewed toward long exposure, which can amplify market moves when sentiment shifts. However, he argues that domestic factors alone are unlikely to trigger a decisive break in the currency pair beyond a specific threshold, stating that it would likely take broader U.S. dollar strength to push USD/BRL above 5.22.
He reiterates that, in his view, the combination of elevated implied yields and Brazil’s energy profile should continue to underpin demand for the Real, even as election-related risks become more visible.
“In an otherwise supportive market for FX carry trades, the Brazilian real was a notable under-performer yesterday. Driving that was both a sell-side bank downgrading Brazilian equities to neutral from overweight, and a new poll result ahead of Brazilian presidential elections in early October.”
“This seems the first day that politics has really started to hit the real this year. We would not chase the real lower, however. 13.4% implied yields through the one-month non-deliverable forwards and Brazil’s position as a net energy exporter should keep the currency reasonably in demand.”
“Positioning is probably quite crowded long the real now, but we suspect it would require a broadly stronger dollar, rather than local news, to send USD/BRL through 5.22.”
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