Brazilian Real: Narrowing polls support BRL against US Dollar– ING

ING’s Chief Analyst Chris Turner reports that the USD/BRL exchange rate is approaching the 5.05-5.07 range as election polls indicate challenger Flavio Bolsonaro is closing the gap on President Lula in the upcoming run-off. While prediction markets still favor Lula, the advantage is narrowing. ING suggests Brazil’s high real interest rates will allow the real to outperform the steep forward curve, with potential nominal appreciation if poll results shift further in Bolsonaro’s favor.

The USD/BRL rate is now at the lower end of its two-month range, aided by recent polls showing Bolsonaro leading in the second-round run-off for the first time. For the first time, a poll placed Bolsonaro ahead of Lula in the run-off, while prediction markets still show Lula as 7% ahead, but the gap is narrowing rapidly. The favorable global investment environment is also boosting the real, which benefits from one of the world’s highest real interest rates.

Investors who have overweighted the Brazilian real are hoping for an advance akin to the Colombian peso if Bolsonaro wins and implements fiscal consolidation and deregulation. At minimum, the real is expected to continue outperforming the steep forward curve, potentially delivering nominal appreciation if polls continue to move in Bolsonaro’s direction.