Brazilian real: electoral threats

The Brazilian real is the third Emerging Market currency that has shown the biggest depreciation against the US dollar since the beginning of 2018. According to the recent news, it’s not a limit and there are big risks that the currency will keep falling.

The Presidential election will take place in October this year. However, it has already started affecting the real. On August 22, the Brazilian currency tested lows of the beginning of 2016. USD/BRL surged to 4.10. Why did that happen?

Elections are always a tight period for a domestic currency because markets don’t like changes. What is more negative for the currency is uncertainties. It is happening to the Brazilian real now. A new poll showed that those candidates that are anticipated to be leaders in the election and are better for markets are behind rivals. It creates big worries among investors and traders.

The investor-friendly candidate Mr. Alckmin got less support than was anticipated by the market.

The former President Luiz Inacio Lula da Silva who was jailed for the corruption got bigger support from voters. Although he is expected to be out of the running, such results increase the unpredictability of the election’s results. Another important question for the market is how many votes Mr. Haddad who is Lula’s running mate, will get if Mr. Lula is pulled out of the running. Up to now, he is at the bottom of the candidates’ list. However, risks still exist. 

Mr. Bolsonaro appeared to be in the second place. However, if he wins the election, the markets will continue being volatile as his program and his ability to put it into effect are questionable.

As a result, doubts that the market-friendly candidate will win the election weigh on Brazilian assets including the Brazilian real. In such a situation, analysts predict that the central bank may take actions if the USD/BRL rises further.

Experts warn that not only election’s worries may make the Brazilian currency highly volatile, but also the melting of the Turkish currency that may create a chain reaction in the emerging markets.

What about the technical picture?

Yesterday the pair reached the 2.5-year high at 4.0915. If the USD returns to the previous maximums in the near future, risks for the BRL will increase. Resistances are at 4.0915 and 4.1120. If election’s worries ease and the USD plunges, the pair will go down. The support is at 3.86.

What about the longer term? The further direction will depend not only on the election issue but also on the strength of the USD. The Federal Reserve is anticipated to raise the interest rate in September. It will give an additional support to the USD. As a result, the depreciation of the BRL may increase significantly. There are odds that the pair will move above 4.1750.

The ING forecasts a further fall of the BRL. The USD/BRL pair will rise to 4-4.20 range during September-October.

Making a conclusion, we can say that the Brazilian real will stay under big pressure until the end of the election running. Moreover, the strengthening of the USD and the situation in other emerging markets will affect it. As the election running in the active phase, traders should think about selling the BRL in the medium-term.