Societe Generale strategists have highlighted growing risks for the Brazilian Real (BRL) as the currency faces heightened political and fiscal uncertainties ahead of the upcoming election, despite a still-supportive carry environment [1]. The USD/BRL currency pair has recently formed a higher low around 5.04 and broken above a descending trend line established since December 2024, now testing its 200-day moving average near 5.22. If this resistance is breached, Societe Generale projects further upside targets at 5.34–5.38 and potentially 5.46, with the recent low at 5.08 serving as initial support [1].
The strategists note that the BRL's weakening toward the 200-day moving average near 5.205 is drawing attention, especially as political tensions intensify ahead of the election. This has led to notable underperformance in the BRL and a possible rotation into the Mexican Peso (MXN) as a more attractive alternative [1]. Additionally, DI rates are rising across the curve, and the Bovespa index reached a seven-month low of 168,000 yesterday [1].
Societe Generale's strategy team downgraded Brazil from bullish to neutral several weeks ago, citing underpriced election and fiscal risks despite the favorable carry backdrop [1]. Economist Dev Ashish assigns a 65% probability to President Lula's victory, likely resulting in a divided Congress. In this scenario, the BRL could weaken further toward 5.25–5.35, which may prompt the Central Bank of Brazil (BCB) to proceed cautiously with monetary easing. The Selic rate is projected to fall to 11.50% by the end of 2027 under these circumstances [1].
CONCLUSION
Societe Generale sees significant election and fiscal risks weighing on the Brazilian Real, with potential for further depreciation if political uncertainties persist. The bank's downgrade of Brazil to neutral and projections for a cautious central bank response underscore the high market sensitivity to upcoming political developments.