Real Outlook Tied to Brazil Election and Policy Execution

Key Moments

Market Response to First-Round Election Results

Commerzbank analyst Norman Liebke reports that the Brazilian real gained ground after Flavio Bolsonaro emerged with a lead in the initial round of Brazil’s elections, pushing USD/BRL lower from about 5.2 to roughly 5.0. This move reflected an appreciation of the real of around 4%.

According to the analysis, the real has since surrendered part of those gains against the U.S. dollar, although the currency pair is still trading at a level significantly stronger for BRL compared with its position prior to the first round of voting.

Short-Term Upside Versus Medium-Term Policy Risks

Liebke highlights that the currency could see further near-term strength if Bolsonaro prevails in the upcoming runoff.

“Following the first round of voting and Bolsonaro’s resulting lead, the Brazilian real appreciated broadly. USD-BRL fell from around 5.2 to approximately 5.0, representing an appreciation of the real of around 4%. The BRL has since weakened somewhat against the USD, but the exchange rate remains well below its level before the first round of voting.”

“If Bolsonaro does indeed win the runoff on Sunday, this is likely to lead to a further appreciation of the real, at least in the short term. How long this BRL euphoria lasts will ultimately depend to a large extent on which fiscal measures Bolsonaro announces and, above all, is actually able to implement. There is therefore considerable potential for a reversal if parliamentary opposition means that he can implement his plans only partially or not at all.”

The commentary underscores that investors are likely to focus on the details of Bolsonaro’s fiscal strategy and his effectiveness in steering measures through parliament. Failure to deliver on promised reforms or significant resistance in the legislature is flagged as a potential catalyst for reversing the real’s gains.

Foreign Policy Considerations and FX Sentiment

The analysis also points to international relations as another important factor for the Brazilian currency.

“In addition to his ability to implement his domestic policy agenda, Bolsonaro’s foreign-policy stance is also likely to play an important role for the real. His close relationship with the US could prove a double-edged sword and is likely to be viewed with considerable caution by market participants. On the one hand, closer ties could help bring the trade dispute with the US to a swift conclusion, which could benefit the Brazilian economy and, accordingly, the BRL.”

Commerzbank concludes that both domestic fiscal credibility and the direction of Brazil’s foreign policy are likely to shape the trajectory of the real in the aftermath of the election.