Brazilian Real: Election-driven support with downside risks – Commerzbank

Norman Liebke at Commerzbank highlights that Brazil’s presidential run-off on 25 October between Lula da Silva and Flavio Bolsonaro is closely watched by markets. A Bolsonaro victory would likely bring more market-friendly, fiscally conservative policies and closer ties to the United States. The Brazilian Real has already appreciated, but faces downside risk if Bolsonaro cannot fully implement his agenda due to parliamentary opposition.

Run-off outcome and FX implications

"In the run-up to the run-off on 25 October, market participants are likely to focus initially on which candidate receives the backing of those eliminated in the first round."

"In particular, Bolsonaro has announced plans for greater fiscal consolidation and a generally more market-oriented economic policy in order to rein in Brazil’s high debt ratio of almost 83% of GDP."

"In that event, there would likely be a significant shift in economic and foreign policy compared with the current government."

"Rising chances of a Bolsonaro victory would tend to provide further support for the real."

"However, this would also create considerable downside risk if Bolsonaro were able to implement his plans only partially, or not at all, due to opposition in parliament."

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