Brazilian Real: Fiscal doubts accompany post-election sell-off – Commerzbank

5.60 was briefly breached as USD/BRL surged. According to Michael Pfister at Commerzbank, Lula’s surprise victory sparked a steep sell-off in the Brazilian Real before the pair closed near 5.40. Markets appear to be repricing the risk of loose fiscal policy and the earlier expansion of the deficit, although a correction is expected in the coming days. Subject to credible fiscal reforms, Commerzbank retains its year-end USD/BRL forecast of 5.20.

5.60 Breached: USD/BRL Surges as Lula Fiscal Risks Hit Real

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"As my colleague Volkmar hinted yesterday, the Brazilian markets did not take Lula’s surprise comeback victory well. After opening, USD-BRL rose to over 5.60 (up from 4.97 on Friday), representing a depreciation of over 11%. Although the rate corrected slightly during trading, it closed still at 5.40."

"This depreciation was probably not unexpected; after all, the election result was a worst-case scenario for some market participants. Flavio Bolsonaro, the son of the imprisoned former president Jair Bolsonaro, had taken an unexpected lead in the first round of voting, having campaigned on a promise to get fiscal policy back on track."

"While Lula has also recently shifted towards fiscal consolidation, he did so only after allowing the deficit to skyrocket through a series of promises. Following the turnaround, it is therefore likely that the markets have once again priced in the risk of loose fiscal policy."

"The initial movement in USD-BRL was sharp; we may therefore see a correction in the coming days, once the election result has been digested. In the medium term, however, the key factor is likely to be whether Lula can credibly implement adjustments to his fiscal policy and carry out reforms."

"Recent history gives us some cause for doubt in this regard, which is why we are sticking with our USD/BRL forecast of 5.20 by the end of the year."

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