Brazilian Real Faces Uncertainty Ahead of Elections
Investors are reevaluating their bets on the Brazilian real as elections approach, with some major banks shifting their strategies to mitigate risk.
The Brazilian real has been losing its luster in recent weeks, with some major banks reevaluating their bets on the currency as elections approach.
## Election Uncertainty Weighs on Brazilian Real
The real has been underperforming compared to other emerging market currencies, despite the country's high interest rates and the recovery of oil prices. This has led some strategists to interpret the move as the beginning of the incorporation of election risk into Brazilian assets.
## Banks Adjust Strategies
The Citi has made a significant change in its carry trade strategy for emerging markets, deciding to close its long position in the real and replace it with the South African rand. The bank cites the increasing risk associated with the presidential election in October as the reason for the change.
According to the Citi's team led by Dirk Willer, the markets currently attribute around 67% probability of victory to President Luiz Inácio Lula da Silva, against 27% for Flávio Bolsonaro. However, the bank believes that investors should demand a higher premium to remain exposed to Brazil as the first round approaches.
| Bank | Election Probability for Lula da Silva | Election Probability for Bolsonaro | | --- | --- | --- | | Citi | 67% | 27% |
## Market Reaction
The Citi's reading is based on recent experiences of other emerging markets, such as Colombia and Hungary, where financial assets underwent a risk pricing process before elections, even with clear favorites.
José Faria Júnior, a partner at Wagner Investimentos, highlights the relative behavior of the real as a key signal. "The real has not responded positively to the high oil prices or the decline in the DXY. It is trading in the opposite direction of the main emerging market currencies," he says.
## Interest Rates and Carry Trade
The Brazil continues to offer one of the highest real interest rates in the world, a condition that traditionally favors flows for carry trade operations.
## Projections and Expectations
The Goldman Sachs also sees a significant change in the dynamics of the currency. In a recent report, the bank stated that the real has entered a phase of higher volatility and that its performance from now on will depend less on current economic data and more on expectations for fiscal policy after the election.
According to the Goldman, the appreciation observed in the first half of the year had been sustained mainly by economic fundamentals and the interest rate differential. However, with the approach of the election, the market has started to attribute greater weight to political uncertainty.
| Bank | 3-Month Projection | 6-Month Projection | | --- | --- | --- | | Goldman Sachs | R$ 5.20 | R$ 5.10 | | Goldman Sachs (previous) | R$ 4.90 | R$ 5.00 |
## Volatility and Expectations
The Goldman highlights that investors are not only concerned with who will win the election, but mainly with the commitment of the next government to fiscal consolidation.
The Itaú BBA has a projection of the dollar at R$ 5.30 by the end of 2026, citing a more challenging environment for the Brazilian currency. According to the Itaú, two factors will gain weight in the coming months: the expectation of additional monetary tightening in the United States and the maintenance of high risk premiums in the domestic market.
| Bank | End-2026 Projection | | --- | --- | | Itaú BBA | R$ 5.30 |
## Market Focus Shifts
The Morgan Stanley also points out that the real no longer seems as attractive for directional long positions as it did in recent months. In the institution's view, the short-term scenario has become more balanced as flows to Brazil have lost intensity, part of the positions favorable to the real have started to be dismantled, and election noise has appeared before the expected date.
As a result, the market focus is shifting from inflation, interest rates, corporate balance sheets, and foreign flows to election polls, probabilities of victory, and, mainly, the design of fiscal policy from 2027.
## Strategic Adjustments
For the Citi's strategists, this shift tends to provoke a tactical reduction of positions in Brazilian assets in the coming weeks.
The Goldman considers that the currency may even present occasional recovery movements, but it is unlikely to sustain a stronger appreciation while doubts persist about the fiscal paths of the next government.
