FX October 08, 2018 / 12:22 pm UTC

Brazil Flows: BRL Extends Gains on Electoral Perspective

By Priscila Robledo

BRL opened the day gaining 2.46% to 3.7480 on better-than-expected performance of market favorite Jair Bolsonaro in yesterday's election.

As expected the first round election was inconclusive, although right-wing candidate Bolsonaro was very close to winning it outright. Bolsonaro has the momentum and is now the favorite to win the presidency despite his high rejection rate. To his benefit, his opponent Fernando Haddad also has a high rejection rate, underlining the deep divide in Brazilian society, which has basically hollowed out the center. 

On the positive side, the center may do much better in Congress and could still influence policies in the medium-term. For that we will have to see the actual policies the candidate will follow as the economic programs remain vague. 

While Bolsonaro's health condition may reduce his chances of campaigning vigorously, there is a strong anti-PT movement and could still give him a fair advantage. It is clear that investors favor a win for Bolsonaro and are already pricing in the event.

Earlier today, September IGP-Di rebounded strongly at 1.79% m/m, 10.33% y/y. The numbers will increase concerns about impact on inflation from depreciation pass-through unless recent appreciatory trend is sustained. For that the market will need to see the PT candidate losing the election.

With the U.S. market on partial holiday, the action will be local. It is a runoff election now and while Bolsonaro has a momentum going, we wouldn't discount the PT electoral machinery just yet. We believe most of the feel-good moment is already priced in and consolidation below 3.90 should continue ahead of new polls.

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I, Priscila Robledo, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.