The Brazilian Real is expected to rally following the results of Sunday's presidential election, where Flavio Bolsonaro secured 47% of the popular vote compared to President Lula's 45% [1]. Both candidates will proceed to a run-off scheduled for 25 October. ING’s Chris Turner notes that markets are likely to assume the remaining 8% of votes will favor Bolsonaro, which has contributed to a more optimistic outlook for Brazilian assets than previously anticipated [1].
Bolsonaro's campaign, which emphasizes fiscal austerity and deregulation, is seen as supportive for both the Brazilian currency and bond markets [1]. Turner draws a parallel to the Colombian peso's strong performance earlier in the year following a right-wing candidate's success, suggesting some investors may hope for similar gains in the Real. However, he cautions that the current global environment, characterized by a strong US dollar and rising US Treasury yields, presents challenges for emerging market currencies, making a repeat of such gains less likely [1].
Turner projects that the USD/BRL exchange rate could open near 5.10, but considers a move back to the year's lows at 4.90 to be too aggressive under current conditions [1].
CONCLUSION
Flavio Bolsonaro's stronger-than-expected performance in the first round of Brazil's presidential election has boosted market sentiment towards Brazilian assets, with expectations of a rally in the Real and bonds. However, external pressures from a strong US dollar and higher US yields may limit the extent of these gains in the near term.