Brazilian Real: Fiscal risks point to weakness against US Dollar - Rabobank

Rabobank’s Mauricio Une and Renan Alves note softer United States (US) inflation and cooling labor data, giving the Federal Reserve (Fed) more time to assess policy. Domestically, the central bank of Brazil's (BCB) monetary policy committee (Copom) minutes highlight gradual transmission of restrictive policy and unanchored inflation expectations. With a fragile Brazilian fiscal backdrop and narrowing rate differentials, Rabobank expects the Brazilian Real to weaken toward BRL 5.35 per U.S. dollar by year-end.

Real seen weaker into year-end

"Externally, U.S. core CPI and PPI readings for July came in softer than expected, reflecting a moderation in both consumer and producer price pressures. This reinforced the view that the Federal Reserve has additional time to assess the inflation outlook amid signs of cooling in the labor market."

"Domestically, the Copom minutes indicate that restrictive monetary policy continues to transmit gradually to economic activity, while unanchored inflation expectations require interest rates to remain higher for longer and warrant close attention to second-round effects."

"Our view, the conflict between the United States and Iran remains on investors’ radar, and the outlook continues to be characterized by elevated uncertainty. Brent crude oil prices remain volatile, stabilizing near US$90 per barrel."

"The Brazilian real ended last week at BRL 5.2228 per U.S. dollar, implying a 2.8% depreciation against the dollar over the week, the weakest performance among 24 emerging-market currencies."

"Given expectations of a narrower interest rate differential between Brazil and advanced economies throughout 2026, together with a potential recovery of the U.S. dollar globally amid a fragile domestic fiscal backdrop in an election year, we expect the exchange rate to return to BRL 5.35 per U.S. dollar by year-end."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)