Wednesday, July 6

Brazil FX volatility to rise as election doubts come to the fore


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BUENOS AIRES — Volatility in Brazil’s real currency is set to increase in the near-term following a relatively calm start to the year as October’s presidential vote becomes the key focus of investors, a Reuters poll of FX strategists showed.

The currency has appreciated a solid 17.7% so far in 2022, favored by the central bank’s tough stance against inflation and differentiation from other units exposed to the global impact of Russia’s invasion of Ukraine.

However, the real could see more instability soon, with concerns over the domestic scenario countering the pull of Brazil’s steep interest rates and strong terms of trade compared to other regions – two factors already priced in.

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The Brazilian currency is seen weakening 8.9% in 6 months to 5.2 per US dollar from 4.73 on Wednesday, according to the median estimate of 29 foreign exchange strategists polled May 30-June 1.

Then, once election doubts have dissipated, the real should resume this year’s appreciation trend, rising slowly to 5.1 per US dollar in one year, which would still imply a 7.1% decline versus its value this week.

“Fiscal risks related to the election are growing as populist changes in taxes could be approved in the next few months, related mainly to fuel and energy,” Lucas Godoi, chief economist at GO Associados, said.

Brazil’s senate is discussing a bill to cap state taxes on fuels and electricity, a key initiative of President Jair Bolsonaro’s government to help bring down high inflation levels that continue to weigh on his reelection chances.

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But this would reduce federal income and revert significant fiscal improvements that led to the biggest primary surplus in 20 years last month, another recent source of support for domestic markets.

Former President Luiz Inacio Lula da Silva has reclaimed a double-digit advantage over Bolsonaro ahead of the election after another center-right candidate quit the race, according to a new poll.

The Mexican peso will probably soften moderately to trade between 20.00-21.00 per US dollar as the unit’s nominal value, currently around pre-pandemic levels, adjusts to this year’s inflation spike.

The central bank’s ongoing tightening campaign, which has brought its benchmark rate up to 7.0% from a pandemic low of 4.0%, has bolstered the peso by offering investors wide spreads on US rates.

In a sign of more potential hikes ahead, minutes from Mexico’s latest monetary policy meeting said policy makers remained worried about persistent inflation. The peso has gained 4.1% since the start of 2022.

(For other stories from the April Reuters foreign exchange poll:)

(Reporting and polling by Gabriel Burin in Buenos Aires; additional polling by Swathi Nair and Susobhan Sarkar; Editing by Bernadette Baum)

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financialpost.com