Latam FX Talking: Moving into orbit of Brazil’s elections
The desk takes a cautiously bullish stance on the Brazilian real (BRL) as the nation heads into a critical election period. According to ING's latest assessment, the real is outperforming other Latin American currencies, bolstered by high carry yields and the expectation that rate cuts from the Central Bank of Brazil (BACEN) won't diminish its attractiveness. The upcoming presidential election on October 4 looms large, especially as President Lula is slightly favored over his challenger Flavio Bolsonaro, though neither candidate has addressed Brazil's pressing fiscal challenges directly. Overall, the anticipation of continued dollar weakness as the Fed refrains from further hikes provides a supportive backdrop for BRL appreciation source.
What the desk is arguing
The desk argues that the Brazilian real is poised to maintain its bullish trajectory as Brazil prepares for its presidential elections. Per the full note from ING, the BRL's yield advantage, with 13% implied returns, combined with expectations of stable monetary policy, positions it favorably among emerging market currencies.
Though Brazil faces political uncertainty, its fundamentals remain robust, with the real having posted the strongest total return against the USD this quarter, as noted. Coupled with an environment of benign dollar depreciation, the real is expected to continue attracting inflows.
Where it sits in our coverage
Current consensus around the USD/BRL exchange rate suggests a target of 5.10, with estimates ranging between 5.00 and 5.15 across several firms.
The desk's bullish tone aligns closely with the general consensus, maintaining a position at the lower end of the projected range, backed by positive carry expectations and political outlook.
How other firms see it
Firms such as jpmorgan and bofa share a similar outlook, suggesting a cautious optimism regarding the BRL's performance as the elections approach. Meanwhile, some analysts express concern, with firms like goldman taking a more reserved approach, leaning towards potential downside if political uncertainties escalate.
Investors should also keep an eye on additional indicators such as Brazil's monetary policy direction and inflation trends, as these factors will significantly influence the BRL moving forward.
How firms align with this view
Aligned with the desk view
Key takeaways
- 01Brazilian real (BRL) is positioned for further appreciation ahead of October elections.
- 02High carry yields and stable monetary policy under BACEN support the BRL's appeal.
- 03Political uncertainty remains, but Lula's lead in polls and lack of austerity discourse could bolster market sentiment.
- 04Watch for implications on USD weakness as Fed policy remains unchanged through year-end.
Market implications
Keep an eye on the BRL's movement around the 5.10 level as the election date approaches. Any shifts in polling data or economic announcements from Brazil could influence market positioning and volatility in this pair.
Risks to this view
A significant turnaround in electoral polling, particularly a surge in support for Bolsonaro, or unexpected fiscal policy discussions could prompt a reevaluation of the BRL's bullish outlook, leading to a potential sell-off.
Articles Latam FX Talking: Moving into orbit of Brazil’s elections Published 12:05 FX Argentina Brazil Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Latin currencies have been relatively stable and have continued to outperform their steep forward curves. Brazil's high carry remains attractive, but investors will have to be attentive to political news in the run-up to the presidential elections in early October. Elsewhere, both the Mexican peso and Chile's peso look quite stable Chris Turner Election uncertainty in Brazil is creeping higher, yet the real remains one of Latam's best performers.
Pictured: Brazilian President Lula USD/BRL: Gearing up for the October election Spot One month bias 1M 3M 6M 12M 5.1224 Mildly Bullish 5.15 5.15 5.00 4.75 Away from the major outperformers of the Korean won and Colombian peso, Brazil’s real has delivered the strongest total return against the dollar this quarter. 13% implied yields remain attractive, and we doubt BACEN 25bp rate cuts in August and September will dent the BRL’s appeal. Increasing focus is being given to the first round of the presidential election on 4 October. President Lula is marginally ahead in the polls, but Flavio Bolsonaro is closing the gap.
Neither candidate wants to discuss austerity despite Brazil’s large deficits. Based on ING’s view of no Fed hikes and a benign $ decline into year-end, the BRL should remain bid and outperform the forward. Source: Refinitiv, ING Forecasts "> Source: Refinitiv, ING Forecasts USD/MXN: Implied volatility can drop Spot One month bias 1M 3M 6M 12M 17.26 Neutral 17.25 17.25 17.25 17.25 USD/MXN implied volatility trades structurally higher than realised volatility but may well come down. 17.10 to 17.70 looks a well-worn trading range, which has shown the peso being quite resilient to dollar strength earlier this summer.
Interestingly, even as the market prices 40-50bp of Fed hikes, very little change is expected in the 6.50% Banxico policy rate. If we’re right with no Fed hikes, USD/MXN will test the bottom of the range. However, Banxico doesn’t like USD/MXN sub-17.00.
Any trouble with USMCA renegotiation or a Fed hike could see USD/MXN press the upside again, but 6.75% yields provide a cushion. Source: Refinitiv, ING Forecasts "> Source: Refinitiv, ING Forecasts USD/CLP: Copper looking like it wants to go higher Spot One month bias 1M 3M 6M 12M 913.88 Bearish 900.00 900.00 900.00 900.00 Kevin Warsh’s less hawkish Fed press conference in July has given Chile’s peso a reprieve. The top of the USD/CLP range at 950 held and it could make a run at 900 if copper can break above $14,000/MT.
Here, all eyes are on Washington and whether the Commerce Department broadens copper tariffs to include more of the raw material. That could prove a double-edged sword for the peso, depending on whether Chile’s exports are exempted. Away from copper, Chile’s growth is not particularly dynamic and implied yields are relatively low within Latam at 3.5%.
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