USD/BRL to rise towards 6.00 as the policy mix heads in the wrong direction – ING

As economists at ING note, the combination of loose fiscal policy and tight monetary policy has typically not been a positive one for the Brazilian real. They see USD/BRL heading towards 6.00 as the left makes a challenge for control into October.

Policy mix undermines BRL

“It looks as though Brazil’s post-pandemic policy mix could be heading in the wrong direction. This can be categorised as a pre-election government looking to find loopholes in the constitutional spending cap and deteriorating fiscal risk premia forcing the central bank into even more aggressive rate hikes.”

“Brazil holds presidential elections on 2 October 2022 with a run-off on 30 October, if necessary. Candidates have yet to declare, yet it seems that President Bolsonaro could be facing a challenge from former President Lula. Latest opinion polls favour Lula in a run-off. The previous Lula administration was synonymous with unfunded government spending and Brazil’s loss of investment grade status. Brazil’s fiscal credibility looks as though it will come under pressure through 2022.”

“Given a strong dollar environment and elections in 2022, we favour USD/BRL trading towards the 6.00 area through the year.”