Brazilian Real Under Pressure Ahead of Election

The Brazilian real weakened to near 5.23 per USD in October, tracking gains by the US currency against other emerging-market currencies. The dollar followed an upward trend against several emerging-market currencies amid expectations of further Fed tightening, as elevated inflationary pressures stemming from the Middle East situation coincided with resilient US economic performance. With the election approaching, financial markets are also being influenced by political developments, with recent polls reinforcing expectations of a tight presidential race. On the data front, Brazil’s manufacturing sector posted its sharpest deterioration in operating conditions since April 2023, according to S&P Global PMI data. Recent labor market data remained consistent with gradual cooling and expectations for GDP to be near flat in 3Q26, despite strong payrolls, keeping expectations for continued Selic easing intact.

The Brazilian real strengthened to 5.20 per USD, tracking moves in other emerging markets as traders remained cautious ahead of October’s presidential election. Recent polls show President Lula and Senator Flávio Bolsonaro within the margin of a technical tie in a potential second-round scenario. Bolsonaro is viewed by markets as more fiscally restrictive, amid elevated domestic yields and weak business activity. Meanwhile, Brazil created 165,827 formal jobs in August, above forecasts of 95,700 and up from 58,568 in July, the highest result since March. Unemployment stood at 5.3% in the rolling quarter ended in August, unchanged from the previous quarter and matching expectations. Despite strong payrolls, job creation remains weaker than in 2024 and early 2025, consistent with gradual labor-market cooling and expectations for GDP to be near flat in 3Q26. The data mostly did not dent expectations for continued Selic easing.

The Brazilian real strengthened slightly to 5.12 per US dollar in September following the release of stronger-than-expected mid-month inflation. Brazil’s mid-month headline inflation rose to 4.47% year over year in September from 4.24% previously, exceeding the 4.30% market consensus. Persistent inflationary pressures could reduce prospects for the continuation of the Selic easing cycle. The 12-month rate is back above the upper bound of the BCB’s target range. The BCB cut its policy rate by 25 bps to 13.75% at its September meeting and left its next steps open, while Copom’s minutes were more hawkish than expected. Abroad, oil prices fell, easing some energy-related pressures, although the external environment remained challenging as global yields rose above recent historical levels before halting their rally on the oil pullback. The US Fed raised its federal funds target rate at its latest meeting. The narrowing interest-rate differential remains a factor supporting the dollar.