Commerzbank Sees Real Rebounding After Election Volatility

Key Moments

Policy Stance and Interest Rate Dynamics

Commerzbank FX strategists Norman Liebke and Michael Pfister view the Brazilian Real (BRL) as fundamentally supported by the Brazilian Central Bank’s (BCB) restrictive monetary policy and still-high real interest rates. They note that the BCB’s approach has been a key factor underpinning the currency.

The analysts emphasize that:

“As last year, the Brazilian Central Bank’s (BCB) hawkish stance has contributed to the real’s strong performance this year.”

Market expectations, according to the report, reflect persistent inflationary pressures from energy costs:

“With energy prices remaining high, market participants now expect the benchmark interest rate to be around 14% by year-end, which is in line with the current level.”

The BCB has also managed to shape expectations around the future path of rates:

“Despite the high real interest rate, the BCB has successfully convinced the market that there will be no more than one additional rate cut this year.”

Election-Driven Weakness Before Recovery

While the policy backdrop is seen as constructive for the BRL over the medium term, Commerzbank expects a period of weakness against the US dollar ahead of Brazil’s upcoming presidential vote.

The analysts write:

“In our view, the real is likely to remain under pressure against the US dollar until the presidential election in October, and inflation and interest rate trends will not resume their dominant role in BRL performance until after the election.”

Medium- to Long-Term USD/BRL Projections

Once the political event risk has passed, Commerzbank anticipates that the currency will again be driven primarily by fundamentals, particularly the central bank’s policy stance.

They state:

“Given the Brazilian central bank’s relatively hawkish stance, the real is likely to continue appreciating, so that USD/BRL should stand at 5.20 by the end of the year, once political risks have subsided, and at 4.80 by the end of 2027.”