Key Moments
- BRL has been the weakest Latin American currency this month, posting a -1.7% total return versus gains of around 2% for CLP and MXN.
- USD/BRL is nearing its 200-day moving average at 5.2042, with a potential technical target zone of 5.34-5.38 if this level is decisively broken.
- Societe Generale’s Dev Ashish assigns a 65% probability to President Lula winning a fourth term with a divided Congress, a scenario seen as negative for the real.
Election and Fiscal Worries Pressure Brazilian Assets
Societe Generale strategist Dev Ashish highlights mounting election and fiscal risks that are weighing on Brazilian markets. He notes that these dynamics are hurting both the currency and equities, putting Brazil behind its regional peers.
According to Ashish, the Brazilian real (BRL) has notably lagged other Latin American currencies this month. BRL’s performance has contrasted sharply with gains seen in the Chilean peso (CLP) and the Mexican peso (MXN), underscoring investor caution toward Brazilian assets.
Relative Performance Across Latin America
Societe Generale points out that, in total return terms, Brazil has underperformed significantly within the region. The real has delivered negative returns while CLP and MXN have generated positive results.
| Asset | Recent Performance / Level |
|---|---|
| BRL (total return this month) | -1.7% |
| CLP (total return this month) | around 2% |
| MXN (total return this month) | around 2% |
| USD/BRL 200-day moving average | 5.2042 |
| USD/BRL technical upside target if 200dma breaks | 5.34-5.38 |
| Bovespa recent low | 167k (seven-month low) |
Base-Case Political Scenario
Societe Generale’s internal base case, as outlined by Dev Ashish, centers on a continuation of the current political leadership under challenging legislative conditions. The bank’s economist assigns specific odds to this outcome.
“Our economist Dev Ashish assigns a 65% probability to a base-case scenario in which President Lula secures a fourth term alongside a divided Congress, a combination that could weigh further on the real.”
The note suggests that such a configuration could intensify existing concerns about policy direction and fiscal management, potentially exerting additional pressure on the Brazilian currency.
Technical Picture for USD/BRL and Bovespa
On the technical front, the report highlights that the USD/BRL pair is moving closer to a key long-term indicator. The 200-day moving average is cited as an important threshold for market participants monitoring the trend in the currency.
“USD/BRL is approaching the 200dma at 5.2042, while the Bovespa has already violated the long-term average after retreating to a seven-month low of 167k.”
From a chart-based perspective, a clear move beyond this moving average is seen as opening up additional upside for the dollar against the real.
“From a technical standpoint, a sustained break above the 200dma would open 5.34-5.38 in USD/BRL.”
Investor Positioning and Flows
The analysis links recent price action to shifting investor perceptions around Brazil’s political and fiscal outlook. These concerns are cited as driving portfolio reallocations within the region.
“This is proof that investors are increasingly repricing election and fiscal risks ahead of the presidential vote, with some fund allocations possibly rotating toward the MXN as a relatively more attractive carry/ politically neutral destination.”
The note characterizes this rotation as a reflection of how political uncertainty and fiscal questions are increasingly embedded in asset pricing for Brazil.
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