Brazilian Real: Rate gap points to weakness against US Dollar – Rabobank

Rabobank’s Mauricio Une and Renan Alves note the Brazilian Real (BRL) appreciated 1.26% against the Dollar over the past week, with USD/BRL around 5.13. However, they highlight global and domestic risks, including narrower interest-rate differentials and fiscal concerns, and forecast the USD/BRL exchange rate at 5.35 by year-end 2026, above consensus.

Real outlook under global headwinds

"The DXY Index (September 4, 2026: 99.157) indicated that the U.S. dollar depreciated 0.5% against its G10 peers over the past week. The MSCI EMFX Index of emerging-market currencies rose to 1,937 points (+0.6%). On Friday, the U.S. dollar closed at BRL 5.1290, implying a 1.26% appreciation of the Brazilian real against the dollar during the week, the 11th-best performance among 24 emerging-market currencies."

"Externally, The U.S. labor market surprised to the upside in August, with strong job creation and a stable unemployment rate, reinforcing the view of a resilient economy."

"Domestically, Brazil's GDP expanded 0.5% QoQ in 2Q26, exceeding expectations, supported mainly by agriculture and the extractive industry, while household consumption, manufacturing, construction, and exports showed signs of slowing or contraction."

"In Brazil, a potential reduction in carry trade inflows throughout 2026 remains an important risk factor. As a result, the Brazilian real continues to be heavily influenced by both global uncertainties, including potentially reduced scope for U.S. rate cuts, concerns regarding the pace of economic slowdown in the United States and China, geopolitical risks, and the possibility of further monetary tightening in Japan, as well as domestic factors, particularly persistent doubts over the sustainability of Brazil's fiscal framework."

"Fed Governor Christopher Waller stated that the September interest rate decision will depend heavily on the August inflation data: an upside inflation surprise could justify a rate hike, whereas a continuation of the disinflation process would support keeping the policy rate unchanged, within the current 3.50%-3.75% range."

"Given our expectation 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 reach 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.)