BRL Weakens as US-Brazil Rate Gap Narrows

The Brazilian real traded between slight gains and losses around R$5.45 in November, remaining at January lows after the BCB held the Selic rate at 13.75%, pausing its easing cycle. The decision reflected a challenging outlook marked by weaker growth, higher inflation and heightened uncertainty following President Lula’s reelection. Expectations were divided, with some investors anticipating a hold and others pricing in a sixth consecutive 25 bps cut. Policymakers cited rising inflation expectations, increased uncertainty and a “more pronounced deceleration” in economic activity. The elevated interest rate continues to support the real by maintaining a wide yield differential that attracts foreign carry-trade inflows. At the same time, the Copom statement highlighted the economic slowdown and uncertainty surrounding its own projections. Labor market data also pointed to cooling activity, as Brazil created 121,305 formal jobs in September, below market expectations of 171,000.

The Brazilian real weakened to around 5.50 per US dollar in November, its weakest level since briefly touching 5.60 immediately after President Lula’s runoff victory over Flávio Bolsonaro. Investors monitored the upcoming Copom decision after the first Focus Bulletin since the election showed higher forecasts for inflation, interest rates and the dollar. In contrast, growth expectations were revised down. In addition, the S&P Global Brazil Manufacturing PMI for October remained in contraction territory. Most market participants expect the benchmark Selic rate to remain unchanged at 13.75% per year, amid concerns over the country’s fiscal outlook. Concerns about the lack of fiscal adjustment have intensified amid uncertainty over key appointments, including the Finance Minister, and the direction of fiscal policy during Lula’s next term.

The Brazilian real weakened to around 5.38 per US dollar, the weakest since touching 5.60 immediately after President Lula’s runoff victory over Flávio Bolsonaro. Investors remain focused on fiscal policy, particularly the government’s commitment to controlling spending and public debt, which has risen significantly in recent years. Concerns over the lack of fiscal adjustment have intensified amid uncertainty over key appointments, including the Finance Ministry, and the direction of fiscal policy in Lula’s next term. Markets had viewed a Bolsonaro administration as more likely to curb public spending, a key factor in lowering interest rates. Brazilian assets had rallied after the first round, when Bolsonaro finished ahead of Lula. Meanwhile, the US dollar strengthened against a basket of currencies following stronger-than-expected GDP growth and accelerating PCE inflation, as Fed policymakers assess incoming data before deciding on their next move.