Brazilian Real Strengthens as Election Rally Puts 4.80 USD/BRL Forecast in Focus

The Brazilian Real strengthened against the US Dollar following the first round of Brazil's presidential election, bringing the USD/BRL exchange rate close to 5.00. Goldman Sachs' favorable fiscal scenario, which forecasts USD/BRL between 4.50 and 4.80, now appears more plausible as investors anticipate the 25 October runoff. The exchange rate dropped to 4.9992 on Monday from 5.2261 on Sunday, marking a 4.34% decline.

With 99.99% of ballot boxes counted, Flávio Bolsonaro led with 47.03% of valid votes against President Luiz Inácio Lula da Silva's 45.16%. Neither candidate secured the majority needed to avoid a second round. Goldman noted that Bolsonaro outperformed polling expectations, while pro-Bolsonaro and right-of-centre candidates also exceeded expectations in Senate and gubernatorial races.

Goldman sees room for further Real appreciation, but the range depends on the policy implications of the eventual result. The bank highlighted that reaching 4.80 would require USD/BRL to fall another 4%, while 4.50 would imply a roughly 10% decline. The upper end of that range is linked to the compression of the 'residual' fiscal premium from the 2024 BRL depreciation episode.

Looking ahead, Goldman expects attention to shift towards the feasibility of reform and policy commitments. The bank draws encouragement from 2018, when the Real continued appreciating after the first round. However, it warns that governability concerns may be less acute this time, but the challenging fiscal backdrop still demands policy announcements to gain greater importance as the runoff approaches.