Brazilian Real: Election-driven gains and risks – Commerzbank

Commerzbank’s Norman Liebke notes that the Brazilian Real strengthened after Flavio Bolsonaro’s lead in the first election round, with USD/BRL dropping from 5.2 to 5.0. The bank expects further short-term Real appreciation if Bolsonaro wins the runoff, but stresses that the duration of any rally will hinge on his fiscal agenda and ability to implement reforms through parliament.

Real reacts to Brazil election dynamics

"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."

"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."