More room for Brazil's real to fall after hitting 31-month low, analysts say
The Brazilian real fell to a 31-month low versus the U.S. dollar on Thursday on jitters ahead of the countryâs October election. But there could me more pain in store, as it hovers dangerously close to an all-time historical low against the U.S. currency, analysts said.
Jitters across emerging markets caused by a stronger U.S. dollar DXY, -0.06% and exacerbated by the unfolding currency crisis in Turkey USDTRY, +0.2567% already took a toll on the Brazilian unit before this week.
âLack of clarity that an investor-friendly candidate will win should weigh on local assets, intensify demand for FX hegde[s] and triggers real selloff towards the 4-4.20 range [versus the dollar] during September and October,â said Gustavo Rangel, chief Latin American economist at ING.
Brazil's real USDBRL, +0.0584% was on track for a more than 5% slide for the week on Thursday, having sold off more than 24% in the year so far, according to FactSet. One dollar last bought 4.1189 real, up sharply from 4.0415 real late Wednesday, a level not seen since January 2016, when the dollar-real pair hit its all-time high.
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Much of this weekâs downward move was inspired by new electoral polls, which showed strong support for former and currently imprisoned president Luiz InÃ¡cio Lula da Silva, who isnât technically allowed to run for office at this point. Right-leaning candidate Jair Bolsonaro and environmentalist Marina Silva also garner ed support. However, the poll numbers werenât in favor of market-friendly candidate Geraldo Ackmin.
The polls underlined the uncertainty surrounding the election, as well as the possibility of a return of a left-leaning government to a nation that is desperate for a public finance and pension reform, analysts said.
At the end of this month, the election campaign is moving into the next stage with television and radio ads, which are expected to help Ackmin due to his TV ad share, said INGâs Rangel. Mid-September will be the deadline to register presidential candidates, which also serves as the deadline for a local tribunal to rule on Lulaâs eligibility to run.
âAs things stand, the likelihood of Lulaâs candidacy being accepted is low, but is nonetheless not an outcome markets will be ready to price out, given the potentially calamitous implications for Brazilâs troubled fiscal outlook,â said Alvise Marino, trading strategist at Credit Suisse.
âIf Lulaâs lead keeps consolidating and no centrist candidate is able to position as a competitive option, investors should keep pricing in a more negative scenario for fiscal accounts,â wrote Elsa Lignos, global head of FX strategy at RBC.
Should the courts prevent Lula from running, the PT (Workers) party is expected to replace Lula with Fernando Haddad, the current vice presidential candidate on the ticket, Rangel said.
That said, Brazilâs central bank also has at least $50 billion in FX reserves to intervene and support the real, market participants pointed out. The central bank intervened earlier this summer to support its currency.
The first round of the presidential vote is scheduled for Oct. 7, followed by the runoff on Oct. 28. The country is currently led by President Michel Temer, who replaced Dilma Rousseff following her impeachment in connection with a budget scandal.
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