Brazilian Real: Bolsonaro runoff risks and fiscal hopes – OCBC

OCBC strategists Sim Moh Siong and Christopher Wong note Brazilian assets rallied after Flávio Bolsonaro’s stronger-than-expected first-round result boosted expectations for a more market-friendly policy mix. The Brazilian Real (BRL) could extend gains if runoff polls ahead of the 25 October vote continue to shift in his favour. However, they caution that elevated election uncertainty implies persistent BRL volatility.

Real supported by election repricing

"Brazilian risk assets surged after a market-friendly outcome in the first round of the presidential election. Flávio Bolsonaro secured 47.1% of valid votes, ahead of President Lula's 45.0%, overturning expectations of a modest Lula lead suggested by pre-election polls."

"Markets responded positively as investors priced in a greater likelihood of a fiscally conservative and business-friendly policy agenda."

"A stronger showing from Bolsonaro and his allies has reinforced expectations of tighter fiscal discipline, greater private-sector support and stronger investor confidence, all of which have been key drivers of the rally in Brazilian assets."

"The BRL could continue to strengthen in the near term if polling ahead of the 25 October runoff points to a widening Bolsonaro lead."

"However, election uncertainty remains elevated, suggesting that BRL volatility is likely to persist until the final vote."

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