Brazil Election Outcome May Not Determine Real's Direction

The upcoming Brazilian election on October 4th could have a significant impact on the country's currency, the Real. According to Goldman Sachs, the USD/BRL exchange rate may move in different directions depending on the outcome of the vote and subsequent policies.

Analysts predict that if the remaining fiscal risk premium disappears, the USD/BRL rate could reach 4.80. This would indicate a stronger Real, as fewer Reais are needed to buy one Dollar. However, if concerns over public finances return to earlier levels, the rate could jump to 5.40-5.80.

The bank's model separates currency movements associated with global factors from those that cannot be explained by these factors. It uses this remaining difference to assess the fiscal premium left by the Real's 2024 depreciation.

Goldman notes that a market-friendly outcome could lead to a plausible range of 4.50-4.80 for USD/BRL, with stronger appreciation requiring more than just the removal of existing worries. However, clear fiscal targets had not yet been discussed when the bank wrote its analysis, making the elimination of the remaining premium a more grounded benchmark.