Brazilian Real Tumbles Amid Election Rumors

The Brazilian real strengthened to around 5.10 per USD in September, reaching a three-week high following the release of the Genial/Quaest poll on the 2026 presidential election. The poll showed President Lula and Senator Senator Flávio Bolsonaro in a technical tie in a potential October runoff, with Lula receiving 42% of voting intentions versus 41% for Bolsonaro. Markets view Bolsonaro as more fiscally restrictive, while elevated domestic yields and weak business activity continue to weigh on the economic outlook. Meanwhile, Brazil’s GDP expanded 0.5% in the second quarter of 2026, slightly above forecasts, driven mainly by agriculture. However, the detailed breakdown was weaker, suggesting economic momentum is fading despite a tight labor market and short-term demand stimulus measures. On the other hand, industrial production rose 0.2% month-on-month in July, rebounding after two consecutive monthly declines.

The Brazilian real weakened to around 5.205 per USD, nearing the one-month low of 5.21 touched on August 14, as a more restrictive policy signal from Fed Chair Warsh supported the US dollar. Warsh said the Fed is tracking the PCE index as its inflation gauge, using firmer rhetoric than earlier suggestions that a newly created task force could shift the central bank’s preferred measure. Rate futures subsequently shifted toward pricing a potential Fed rate hike next month. Meanwhile, Brazil created 58,568 formal jobs in July, well below forecasts of 112,000 and down sharply from 145,161 in June. Inflation eased to 4.25% in the first half of August, below the BCB’s 4.5% upper tolerance band. Softer labor and inflation data could allow the BCB to continue its 25-basis-point easing cycle. A Fed hike and a BCB cut would narrow the rate differential and reduce the appeal of Brazilian assets. However, unemployment fell to 5.3% in the rolling quarter through July, its lowest level since 2025.

The Brazilian real strengthened slightly to 5.16 per USD after reaching a more than one-month low of 5.21 on August 14th, amid expectations of new foreign-exchange operations by the BCB. The central bank is expected to intervene to increase dollar supply and ensure market liquidity, supporting the real and influencing exchange-rate formation. Meanwhile, labor market data confirmed expectations for another decline in Brazil’s unemployment rate, from 5.4% to 5.3%. The labor market remains highly resilient, with employment and formal employment reaching record highs, which could lead the Copom to pause its 25-basis-point-per-meeting easing cycle. However, Brazil’s inflation rate eased to 4.25% in the first half of August from 4.44% in July, remaining below the central bank’s 4.5% upper tolerance band.