Brazilian Real Strengthens on Lower Inflation

The Brazilian real strengthened slightly to around 5.08 per US dollar in September, reaching a more than one-month high following lower-than-expected inflation data. Brazil’s annual inflation rate eased to 4.22% in August 2026 from 4.44% in July, slightly below forecasts of 4.27% and moving further within the central bank’s target range of 1.50%-4.50%. With the Selic elevated, upward pressure on real returns on bonds is increasing the attractiveness of fixed-income market to foreign investors seeking yield. Also, lower inflation reduces the country’s risk premium, boosting foreign investor confidence. However, the data raised bets that the BCB will cut the Selic by at next week’s Copom meeting. This would narrow the rate differential, as bets on a Fed rate hike remain high following US CPI coming largely in line with forecasts. Meanwhile, gains by Flávio Bolsonaro in recent presidential election polls have supported the real, as markets view Bolsonaro as fiscally restrictive.

The Brazilian real strengthened to around 5.09 per USD in September, reaching an over three-week high following the release of new polls on the 2026 presidential election. The polls showed President Lula and Senator Senator Flávio Bolsonaro in a technical tie in a potential October runoff. 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.