Brazilian Real: Election polls and carry underpin BRL – ING

ING’s Chris Turner notes a supportive backdrop for carry trades and says the Brazilian Real (BRL) is also benefiting from polling that narrows President Lula’s lead over Flavio Bolsonaro to one point. With 12% implied yields and potential regime change, Turner expects USD/BRL to be volatile into the 4 October election but sees scope for the Real to outperform the forward curve.

Carry appeal and political risk

"It has been a positive environment for the carry trade, but what has also been helping the Brazilian real this week has been an opinion poll showing that President Lula's lead over Flavio Bolsonaro has dropped to just one percentage point."

"Bolsonaro is running on a ticket of fiscal consolidation and hoping to emulate the victory of Colombia's Abelardo de la Espriella this year, which has been greeted warmly by local asset markets."

"The first round of the Brazilian presidential election takes place on 4 October. Expect USD/BRL to be bounced around by polling results before then."

"But with 12% implied yields through the forwards and the chance of a regime change, we suspect the real can continue to comfortably outperform the steep forward curve."