Brazilian Real: Losses against US Dollar deepen on election shock - SocGen

5.20–5.31 is the key USD/BRL resistance zone flagged by Societe Generale strategists. Lula’s surprise election victory secured him a fourth term, prompting expectations of steep Brazilian Real (BRL) losses as long BRL positions unwind. The bank’s economists forecast a more limited easing cycle, with Selic rates staying higher for longer.

Fourth-term Lula victory raises Real slump risk

"Lula wins fourth term as President after surprise defeat of Bolsonaro 51.8% vs 48.2% in election runoff. BRL set for sharp losses, unwind of MXN rotation trade of past two weeks. BCB set for shallower easing cycle, SG economics write-up. USD/BRL resistance 5.20/5.24/5.31."

"For our economists, the victory of Lula means fiscal consolidation is likely to remain gradual, leaving debt concerns unresolved and supporting a higher-for-longer interest-rate outlook. Lula begins his fourth term facing a significantly more conservative Congress, with the political right strengthening its presence in both chambers. This points to a more challenging legislative environment and limits the administration's ability to pursue ambitious policy initiatives."

"They expect a shallower easing cycle by the central banks, with the Selic rate ending 2027 at 12.25% and remaining above market expectations through 2028."

"The unwinding of long positions spells trouble and a painful slump in the real in the coming days. A 2SD drop would deflate BRL to 5.25, a 3SD pummeling would drive the currency below resistance at 5.31 towards 5.33. Beyond that, we’re looking at levels closer to 5.40."

"USD/BRL decline has stalled after carving out a higher low at 4.94, compared with the May low of 4.88. The pair attempted to break above the 200-DMA last month but encountered strong resistance near 5.20/5.24, making this an important hurdle. If USD/BRL overcomes this zone, a larger rebound cannot be ruled out, with the next projections located at 5.31 and 5.39."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)