Brazilian Real: Bolsonaro boost faces parliamentary constraints – Commerzbank

Commerzbank’s Norman Liebke notes the Brazilian Real (BRL) strengthened about 4% as USD/BRL fell from 5.2 to 5 on F. Bolsonaro’s election lead. He cautions that despite gains by Partido Liberal and other conservatives, Bolsonaro would still lack outright majorities and remain reliant on alliances. Market-friendly reforms and Real-positive policies therefore face political hurdles, tempering early optimism.

Real rally tempered by reform doubts

"Market participants' early optimism should therefore be taken with a grain of salt. A nominally more conservative parliament is no guarantee of smooth economic policymaking. First, the right-conservative bloc outside the PL remains fragmented."

"Reforms will therefore likely continue to require political compromises. Second, there is always the risk that market-oriented initiatives lose priority as political pressure increases. Even with the new parliamentary balance of power, it remains uncertain whether the reforms announced by F. Bolsonaro would actually be implemented if he wins the election."

"However, these results still fall short of an outright majority. The PL therefore remains dependent on alliances and agreements with other parties, even though other conservative parties also gained seats. A potential President F. Bolsonaro would thus face a more favorable environment than his father Jair Bolsonaro did, but there can be no talk of governing without constraints."

"Conversely, if Lula were to win the runoff election, he would face an even greater challenge in advancing his own political agenda. In the meantime, until the runoff, market participants are likely to focus on signals from the third-placed candidates and react to whichever of the two candidates they choose to endorse."

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