Brazilian Real Strengthens as Fed Rate Hike Bets Ease

The Brazilian real edged lower to around 5.045 per US dollar ahead of the presidential runoff, amid uncertainty surrounding the election. A Datafolha poll showed Senator Flávio Bolsonaro and President Lula tied at 50% each of valid votes. Earlier polls also indicated a statistical tie, with Bolsonaro’s lead narrowing compared with previous surveys. Some market participants believe a Flávio Bolsonaro administration would be more likely to rein in public spending, although neither the candidate nor his economic advisers have outlined concrete fiscal adjustments. Meanwhile, Brazil’s mid-month inflation rate reached 4.62% in October, below market expectations of 4.74%.

The Brazilian real weakened to near 5.05 per USD from the near five-month high of 4.98 touched October 5th, as investors reconsidered the likelihood that fiscally conservative candidate Flavio Bolsonaro will win Presidential runoffs later this month. New polls showed Bolsonaro's lead over President Lula narrowing. Brazilian assets had rallied last week after the senator unexpectedly finished ahead of Lula in the first round. Although Bolsonaro has yet to present detailed policy plans, investors view him as more likely to pursue fiscal reforms, including spending cuts, which are seen as essential to lowering interest rates. Questions also remain about the fiscal discipline of a potential Flávio administration. Political pressure has already prompted the candidate to change his position and support ending the six-days-on, one-day-off work schedule, which the Senate approved yesterday.

The Brazilian real strengthened to below 5.00 per US dollar in October following the release of the first polls for the presidential runoff. A Datafolha poll showed Senator Flávio Bolsonaro with 49% of voting intentions against 45% for President Lula, a statistical tie at the limit of the two-percentage-point margin of error. An Atlas/Bloomberg poll put Flávio at 51.1%, compared with 45.7% for Lula, ending the statistical tie in the previous survey’s runoff scenario. Markets view Bolsonaro as more fiscally restrictive amid elevated domestic yields and weak business activity, and his economic team is considering spending cuts equivalent to around 2% of GDP. Flávio finished ahead of Lula in the first round, defying most polls and sending the real to a 17-month high on October 5th. Meanwhile, the BCB held a regular foreign-exchange swap rollover auction on the 9th. Such interventions are used to help reduce exchange-rate volatility during periods of political and economic uncertainty.