Election results bring hope in the BRL back
The first round of a vote at the most unpredictable elections in Brazil took place on October 7.
Why are they so unpredictable? You can find the answer to this question here.
The results of the first round showed the leadership of right-leaning Jair Bolsonario. He overcame the leftist Fernando Haddad by 17%. The next round will be on October 28. For now, completely opposite sides of the chosen candidates are causing significant volatility in the Brazilian real.
Let’s have a look at the election programs of two candidates to understand whose policy will influence the Brazilian currency the most.
Both Bolsonaro and Haddad suggest market-friendly policies in their election programs. They involve promoting foreign direct investments, reducing the bureaucracy and changing the social security basics.
On the one hand, Fernando Haddad represents the Workers party which is believed to be responsible for the poor economic performance of Brazil. In addition, Haddad compared the market to an “abstract entity that terrorizes the public” in his Twitter. This may negatively affect the performance of the Brazilian currency .
On the other hand, Mr. Bolsonario is described as US-oriented supporter of privatization. He got a huge support from voters after he promised to end up the corruption and crimes.
However, some of Bolsonario’s comments made markets worry. A former army captain was claimed as “tropical Trump” due to his authoritarian and nationalist statements. If he turns to dictatorship regime, it will result in the capital outflow and will put the economy of the country into uncertainties. Otherwise, if Bolsonario sticks to the democratic course and applies the promised reforms, the BRL will be supported.
On a daily chart, USD/BRL fell from 4.0515 to 3.8365 during the last week. The first round of elections pulled the pair even lower. The pair tested the support at 3.70. It means that the market is satisfied with the victory of Bolsonario. This is positive news for the BRL. If Bolsonario wins, it can lead to the further fall of the pair.
According to the analysts, the Brazilian real will keep gaining at least until the second round of the vote. The next movements will depend on how well Bolsonario or Haddad will deal with the national budget deficit, which reached 76.9 billion BRL in August. Moreover, the strong USD may change the situation. If the US dollar index reaches highs of 96.85, the risks of the BRL’s depreciation will increase.
In conclusion, even if the elected president successfully deals with reforms needed, the stabilization of the Brazilian economy and the BRL will take months or even years.