Brazil’s Currency Will Trade in a Tight Range Ahead of Elections

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Brazil’s real will remain in a tight range this month as Brazilians prepare to vote in presidential elections on Oct. 2, a Reuters poll showed on Wednesday.

The dollar index hit a two-decade high on Tuesday and is expected to remain strong on expectations of continued rises in US interest rates, and the better performance of the US economy relative to its peers.

In the coming weeks, the real is expected to trade without advancing more than 0.15% to 5.24 per dollar, according to the survey. But analysts said the currency is poised to slide into negative territory and lose 0.8% in three months.

“We do not anticipate major changes in the short term as we believe it will be a peaceful election. We do not see risks of institutional crisis or violence, as happened in the United States when Biden began his term,” said Ronaldo Patah, director of investments at UBS. (SIX: UBSG ) Wealth Management in Brazil.

Former Brazilian President Luiz Inacio Lula da Silva, a leftist, has 44% of the preferences for a first electoral round against 34% of the current far-right president Jair Bolsonaro, according to a Genial/Quaest poll published on Wednesday.

Almost all emerging market currencies are expected to weaken or, at best, remain at their current levels in the next three months, as the tightening of monetary policy by the US central bank improves the position of the dollar as a safe-haven asset.

However, the relatively stable outlook for the Brazilian currency could change after January 2023, when the winner of the presidential elections presents a new fiscal framework for the country, Patah added.

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In a year, the real is forecast to strengthen 0.9% to 5.20 per dollar, according to the median estimate of 28 currency strategists who were surveyed Sept. 1-6.

Reflecting nervousness about the real’s future, seven of 14 respondents, who answered a separate question about currency risks, said they were inclined to expect further weakness. Five saw risks to the upside and two saw them as balanced.

“The central bank of Brazil seems to have finished with the monetary adjustment, so more Fed funds rate increases will reduce the gap more quickly and, in the short term, it may start to affect foreign exchange inflows,” Mauricio said. Nakahodo, senior economist at MUFG.

Analysts expect further rate hikes from the Fed and expect the US central bank’s overnight benchmark rate to be in the 3.25%-3.50% range by the end of this year, a percentage point higher than the current level.

Meanwhile, the Mexican peso is expected to fall 3.9% to 20.85 per US dollar in a year, despite analysts raising inflation forecasts and reinforcing bets that authorities will continue to rise by raising the central bank reference rate.

The Mexican peso has gained more than 2% against the dollar this year, while the real has risen more than 6%.

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