Brazilian Real can Strengthen Further against the Pound
Image © Fred Cardoso, Adobe Images
- Bolsonaro wins first round of presidential elections and leads polls
- BRL rises as markets view him as 'market-friendly'
- GBP/BRL in downtrend due to election risk
The Brazilian Real is rising on expectations the right wing candidate in the presidential elections on October 28, Jair Bolsonaro, will win after his strong showing in a recent poll and his victory in the first round.
The poll by Ibope showed Bolsonaro winning 59% of the vote versus the other main candidate Fernando Haddid's 41%. The poll has a 2.0% margin of error.
The Brazilian Real has risen versus the Pound from a 13 September high of 5.51 to a low of 4.85 registered on October 8 when Bolsonaro won the run-off.
This comes despite most currencies losing ground versus Sterling over the same period.
The Brazilian Real has risen due to Bolsonaro being seen as the most market-friendly leading candidate. Fernando Haddid, on the other hand, is from the workers' party and his left-leaning policies are not viewed as positively by markets.
The Real's rally is expected to extend beyond the announcement of the election result on October 28, according to some. There is a high degree of certainty that Bolsonaro will win and this suggests that the result has already arguably been priced into the exchange rate, however, some analysts still expect the Real to appreciate further after the final result.
"Even though a Bolsonaro victory has become the base-case scenario for most investors, we continue to expect his eventual victory, if confirmed, to extend the appreciation trend seen across Brazilian assets in recent weeks," says Gustavo Rangel, chief economist LATAM, at ING Bank N.V.
Rangle adds that one variable not connected to the election is more generalised emerging market risk sentiment.
"The extent of the rally should also depend on external drivers, including risk aversion towards emerging-market assets," he adds.
In relation to the USD/BRL rate, downside may be limited by the strong-Dollar story, according to Chris Turner, head of FX at ING.
"Until we see: (i) clear signs that the market has confidence where the top is for the Fed cycle and (ii) Washington softening its stance on China and trade, we would expect the dollar to stay supported against emerging market and pro-growth currencies," says Turner.
"We appreciate it’s tempting to buy some undervalued EM FX with high yield (Brazilian real, rouble offer around 6% annualised implied yields through the 3-month forwards and the Turkish lira offers 27%), but external headwinds to EM suggest patience," adds Turner, in a more explicit warning.
Nevertheless, unlike other LATAM FX, the Real has risen recently on the idiosyncratic risk associated with the presidential election.
As far as GBP/BRL goes, the consensus appears to be that the Pound remains at risk of high volatility in both directions due to the 'binary' nature of Brexit outcomes.
Given multiple warnings that USD may be peaking, we think the best way to play BRL election maybe via a USD/BRL bearish bet.
ING's Gustavo Rangel sees a possibility USD/BRL will decline to 3.5 following a Bolsonaro election win. ING's end of year forecast is 3.7.
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