Brazilian Real Gains as Election Results Surprise Market

Key Moments

Election Surprise Shifts Market Expectations

Brazilian assets are expected to advance following the latest presidential election results, according to Chris Turner of ING. Preliminary figures from Sunday’s vote showed Flavio Bolsonaro winning 47% of the popular vote, compared with 45% for President Lula.

As neither candidate achieved an outright majority, the race will proceed to a run-off on 25 October. Turner notes that market participants are likely to assume the remaining 8% of ballots will favor Bolsonaro, especially given that the contest had been widely anticipated to be extremely close. The stronger-than-expected first-round showing by Bolsonaro is seen as a positive surprise for investors.

Policy Agenda Supports BRL and Bonds

Turner highlights that Bolsonaro’s platform, centered on fiscal austerity and deregulation, is supportive for both the Brazilian real and local bond markets. This policy mix is viewed as market-friendly, encouraging expectations of tighter fiscal management and a more liberal regulatory stance.

He also points out that some market participants may be looking to parallels in other Latin American currencies, referencing the performance of the Colombian peso earlier in the year, following electoral developments that favored a right-wing candidate.

External Backdrop Limits Upside

Despite the constructive domestic story for Brazilian assets, Turner cautions that global conditions are less favorable for emerging market currencies than earlier in the year. He flags the combination of a stronger US dollar and sharply rising US Treasury yields as a challenging external backdrop that could temper the extent of any rally in the Brazilian real.

USD/BRL Outlook

Against this mixed domestic and global context, Turner expects the USD/BRL pair to open around 5.10. While some investors may hope for a return to the year’s lows, he judges that “a move back to the lows of the year at 4.90 looks too aggressive right now.”