Brazilian Real Rebounds After BCB

The Brazilian real weakened past 5.45 per US dollar to eight-week lows as uncertainty over the timing of Brazil’s rate cuts, the political shock to fiscal credibility, and more attractive foreign yields pressured the currency.

November headline inflation eased to 4.46% annually, the lowest since September 2024, improving the path toward future cuts but not enough to ensure them, keeping Copom on track to hold at 15% and leaving traders debating how soon easing will begin.

Political risk has also resurfaced after the return of “Flávio Bolsonaro risk” alongside congressional efforts to reduce sentences for those involved in January 8, reigniting doubts about the sustainability of a market friendly opposition and the broader fiscal outlook.

At the same time US Treasury yields remain elevated, raising the opportunity cost of holding reais just as markets struggle to gauge the pace of Fed easing, making flows into high yielding emerging markets riskier.

The Brazilian real steadied around 5.44 per US dollar, struggling to recover from last week’s sharp selloff as investors monitor the impact of political election uncertainty on fiscal sustainability and risk.

Over the weekend Senator Flávio Bolsonaro signalled he may withdraw his candidacy which eased the immediate risk premium, yet his warning that any exit would come at a price has only prolonged uncertainty about the opposition’s cohesion and whether a market friendly fiscal compact can hold.

At the same time the market is sitting on two major policy events this week the Central Bank Copom decision on Selic and the Federal Reserve decision in the United States so dealers are trimming positions and awaiting clearer guidance on rates and interest differentials.

Finally, Focus survey readings only nudged inflation forecasts marginally lower while keeping Selic expectations high so the carry advantage remains strong but is not enough to offset renewed political risks.

The Brazilian real rebounded past 5.40 per US dollar as political uncertainty that shocked markets last week eased and macro signals turned mildly supportive.

Over the weekend Senator Flávio Bolsonaro signalled he may withdraw his candidacy, removing the heavy risk premium that had split the opposition and threatened a market-friendly fiscal compact.

At the same time, the weekly Focus survey nudged year-end inflation estimates marginally lower and lifted GDP forecasts, strengthening the case that the Selic can remain at current historic restrictive levels rather than prompt disruptive fiscal responses.

Finally, the US dollar remained broadly subdued amid near certainty the Federal Reserve is due to cut rates later this week, amplifying Brazil’s carry trade advantage.

The Brazilian real tumbled past 5.38 per US dollar after a rally toward May 2024 highs because a sudden shift in the 2026 electoral outlook raised perceived fiscal and policy risk at a moment when the currency’s cushion was already thin.

News that Jair Bolsonaro may back Flávio Bolsonaro broke expectations that a more moderate, market friendly coalition would coalesce, prompting investors to widen Brazil’s sovereign risk premium.

That political shock compounded with data pointing to slower momentum, with Q3 GDP up 1.8% year on year as the weakest expansion in over three years, setting the stage for looser borrowing conditions.

At the same time, a still tight labour market and sustained real wage gains keep government revenues and household incomes relatively resilient which limits the near term fiscal hit.

Elsewhere, the US dollar remained broadly subdued amid near certainty the Federal Reserve is due to cut rates next week, amplifying Brazil’s carry trade advantage.

The Brazilian real appreciated past R$5.29 per US dollar toward May 2024 highs as markets absorbed the third quarter GDP print alongside a broadly softer US dollar.

GDP rose 1.8% year on year in the quarter, the softest expansion in over three years, a clear sign the economy is cooling and increasing the probability the central bank will begin easing from near two decade high policy rates in the months ahead.

That cooling is visible across goods and services even as the central bank’s governor has warned the slowdown remains gradual.

At the same time a tight labour market and sustained real wage gains keep household income and tax receipts resilient which moderates near term fiscal pressure and reduces the chance of abrupt policy shifts.

At the same time, the US dollar remained broadly subdued amid near certainty the Federal Reserve is due to cut rates next week, amplifying Brazil’s carry trade advantage and providing a solid footing for the real.

The Brazilian real strengthened past 5.3 per US dollar, moving toward its May 2024 highs last tested in November as the US dollar weakened on near certain bets of a Fed rate cut in December after mounting signs of a softer US labor market.

Meanwhile, Brazil reported unemployment at 5.4% in the quarter to October and an unemployed population near 5.9 million while average real wages rose to R$3,528, a mix that strengthens household incomes and tax revenues and eases short term fiscal pressure.

With employment at historical lows and labour income rising, domestic demand should stay resilient even as the Selic rate remains at 15%, which preserves Brazil’s interest rate premium and keeps carry flows into local assets and the currency.