According to ING’s Chris Turner, the Brazilian Real (BRL) is currently benefiting from a supportive environment for carry trades, as well as recent election polling data that shows President Lula's lead over Flavio Bolsonaro has narrowed to just one percentage point [1]. Turner highlights that Bolsonaro is campaigning on a platform of fiscal consolidation and is seeking to replicate the market-friendly victory of Colombia's Abelardo de la Espriella earlier this year, which was positively received by local asset markets [1].
The first round of the Brazilian presidential election is scheduled for 4 October, and Turner expects the USD/BRL exchange rate to experience volatility in response to polling results leading up to the election [1]. Despite the anticipated volatility, the BRL is supported by 12% implied yields through the forwards and the possibility of a regime change, which could allow the currency to outperform the steep forward curve [1].
Overall, the combination of high carry appeal and shifting political dynamics is creating a favorable backdrop for the Brazilian Real, although market participants should be prepared for fluctuations as election developments unfold [1].
CONCLUSION
The Brazilian Real is currently underpinned by high implied yields and a tightening presidential race, which ING believes could lead to outperformance despite expected volatility. Investors should monitor polling data and political developments closely as the 4 October election approaches.