USD/BRL: Brazilian real set to gain further - Danske Bank

According to analysts from Danske Bank, the Brazilian real is likely to appreciate further if Bolsonaro wins in the second round of the presidential elections (Oct 28). 

Key Quotes: 

“Not only is Bolsonaro’s surprising lead set to cheer the market and BRL, but also more seats were gained by market-friendly forces – the Brazilian Social Democracy Party (PSDB), PSL, the Democrats (DEM), the Popular Socialist Party (PPS) and the Progressive Republican Party (PRP) – in the Senate. At the same time, less market-friendly parties lost seats. Thus, together with the centrists, pro-market parties form a clear majority of 68 seats in the 81-seat Senate. The new Chamber of Deputies will be dominated by right-leaning and centrist forces.”

“Given that during the past 30 years of election history, the winner of the second round has led in the first one, Jair Bolsonaro stands a good chance of winning the election on 28 October. Thus, the BRL is set to gain further on market expectations before the day of the second round.”

“Following the second round of the presidential election, the BRL’s medium- and long-term prospects will depend on the progress of the long-awaited pension reforms and developments on Brazil’s fiscal side. Rising US Treasury yields and shaky sentiment across emerging markets would put the brakes on BRL’s extra strengthening, while a resumed increase in the crude price would be BRL positive. If Bolsonaro wins, we would expect the USD/BRL to fall to 3.75 in 1M, 3.70 in 3M, 3.65 in 6M and 3.60 in 12M.”