Brazilian Real: Election shock raises losses against US Dollar - SocGen

Societe Generale strategists highlight Brazil’s election surprise, with Lula securing a fourth term and triggering expectations of sharp Brazilian Real (BRL) losses. They see unwinding of long BRL positions and stress key resistance levels around 5.20–5.31 for USD/BRL. The bank’s economists project a shallower easing cycle and higher-for-longer Selic rates.

Real slump risk after Lula victory

"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.)