Brazilian Real: How Is the Election Shock Driving a Sharp Repricing? – Deutsche Bank

Brazilian assets face pressure following a surprise election outcome highlighted by Deutsche Bank strategists: a Tokyo-listed ETF tracking Brazilian equities dropped sharply, while derivatives indicate a weaker Real. President Lula secured a fourth term despite trailing in the first round. With Congress shifting to the right, the strategists expect constraints on fiscal loosening, leaving the outlook for Brazilian assets crucially dependent on Lula’s ability to set out a credible fiscal path.

Can Lula’s victory deliver a credible fiscal path?

"In Brazil, President Lula pulled off a remarkable and genuinely market-moving comeback overnight, winning a record fourth term by 51.8% to 48.2% against Flávio Bolsonaro, despite having lost the first round 45.1%-47.0% three weeks ago."

"It is the first time since Brazil returned to direct presidential elections in 1989 that the first-round runner-up has gone on to win the runoff. The result wrong-footed a market that had increasingly priced a Bolsonaro victory."

"A Tokyo-listed ETF tracking Brazilian equities fell around -15% in Asian trading, with the real also tracking a -10% decline according to derivatives. Bolsonaro had been viewed as the more market-friendly candidate and, after right- and centre-right parties increased their Senate share from 47% to 63% in the first round, investors had been anticipating a better chance of fiscal consolidation."

"Lula, by contrast, has promised an adjustment without yet specifying how it will be delivered. The important medium-term point, however, is that the rightward shift in Congress remains even after Lula's victory, which should constrain the administration's ability to pursue a materially looser fiscal agenda."

"So once the immediate election premium and Bolsonaro's challenge to the result are digested, the bigger question for Brazilian assets will be whether Lula can use that congressional constraint to establish a credible fiscal path. That matters, especially with debt concerns already keeping rates high."

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