Pound-to-Brazilian-Real Rate to Decline as President-elect Bolsonaro Gets to Work

Image © Fred Cardoso, Adobe Images

The Brazilian Real hit a six-month high Monday after the right-wing and pro-business candidate Jair Bolsonaro prevailed over his opponent in the final round of voting to clinch the presidency, setting the stage for a period of recovery by the currency against both the Dollar and Pound.

Bolsonaro, a former army captain and Social Liberal Party leader, has drawn a line under nearly two decades of rule by the left-wing Workers' Party in Brazil.

He secured 55.2% of the the vote while his Workers' Party opponent Fernando Haddad scored just 44.8%, according to electoral authority TSE. 

Conservative social views mean Bolsonaro was billed as a "populist" candidate. But after running on an anti-corruption and law-and-order ticket, he's succesfully usurped a left-leaning establishment from an entrenched position of power. 

However, there is a significant pro-market and fiscally conservative bent in his policy platform that has also gone down well with the markets. The currency, stock and bond markets rose in salutation Monday.

"The election result leaves Bolsonaro with strong political capital and a mandate to implement reforms," says Gustavo Rangel, chief LATAM economist at ING Group. "Ultimately, it’s still too soon to say that Brazil’s fiscal accounts will be re-anchored, but we believe that the electoral results improved materially the country's fiscal outlook."

Bolsonaro takes office on January 01, 2019 and it is hoped by many he will root out corruption from within the state institutions and that his policy agenda will enable Brazil to finally draw a line under years of recession.

Brazil spent between 2014 and 2017 mired in political and economic crises, which saw Workers' Party president Dilma Rousseff impeached in August 2016 over a bribery scandal, and its worst recession on record.

Two years of recession saw the government budget deficit rise as high as 10.2% of GDP before declining to only 7.8% of GDP in 2017, while the national debt pile rose from 56.2% of GDP to 74%.

Bolsonaro's advisers are believed to been keen on privatising state-owned companies such as Petrobas while the president-elect himself has already committed to "welfare reforms" that are intended to reduce state spending.

"The USD/BRL should consolidate below 3.7 in the nearer-term, likely reaching 3.5, but we continue to see 3.7 as closer to “equilibrium” for the currency," says Rangel, suggesting the Brazilian currency can strengthen further over coming months. "However, doubts over the new administration’s ability to approve unpopular fiscal austerity initiatives are bound to intensify, sooner or later."

The USD/BRL rate was quoted 0.44% lower at 3.6275 Monday, its lowest level for six months and making it one of few U.S. Dollar rates to have declined Monday, while the Pound-to-Real rate was down 0.51% at 4.64.

ING's Rangel says the USD/BRL rate will continue to decline over coming months. If this happens and the Pound-to-Dollar rate does not rise during that time, then the Pound-to-Real rate should also fall alongside the USD/BRL. 

The Pound-to-Real rate is after all a foreign exchange cross rate that is calculated at its most basic level by dividing the Pound-Dollar rate over the BRL/USD rate.

In order for Sterling to fall against the Real, the Real must rise further and faster against the Dollar than its British counterpart does and vice versa.

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