Brazilian Real: Election risks threaten carry story – Societe Generale

Societe Generale strategists note USD/BRL has formed a higher low and is testing its 200-day moving average near 5.22, with upside projections toward 5.34–5.38. They have downgraded Brazil to neutral, warning that underpriced election and fiscal risks could weaken the Brazilian Real (BRL), even as carry remains supportive.

Real vulnerable as politics heat up

"USD/BRL recently formed a higher low around 5.04 and has broken above the descending trend line drawn since December 2024. The pair is now challenging the 200-DMA. "

"The June peak at 5.22 is a potential resistance. If USD/BRL overcomes this hurdle, an extended rebound could take shape."

"The next objectives may be located at projections of 5.34/5.38 and 5.46. The low recorded earlier this week at 5.08 represents the first support."

"In LatAm, the weakening of the BRL towards the 200dma near 5.205 is not going unnoticed. Thin liquidity does not escape scrutiny but political tensions are brewing ahead of the election, causing notable underperformance and possible rotation into MXN as a more appealing option."

"DI rates are grinding upwards across the curve and the Bovespa plumbed 7-month low of 168k yesterday. Our strategy team downgraded Brazil to neutral from bullish several weeks ago, arguing that election and fiscal risks are underpriced notwithstanding the favourable carry backdrop."

"Our economist Dev Ashish argues in his election outlook that victory for President Lula is the case and carries a 65% probability, alongside a divided Congress. In this scenario, the BRL could weaken towards 5.25-5.35, forcing the BCB to proceed cautiously with easing. The Selic rate would then drop to 11.50% by end-2027."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)