Barclays expects the Brazilian real to show strength over the coming weeks, backed by what the bank describes as supportive external accounts and comparatively high real interest rates versus other emerging market peers. The bank notes these conditions are likely to help the currency in the near term even after recent moves by the central bank.
According to Barclays, global developments will be the main determinant of the real's direction through mid-August. The bank sees investor focus shifting away from those global drivers as the calendar moves closer to Brazil's presidential election, with attention turning to domestic political risks and outcomes.
Barclays' outlook calls for the real to underperform heading into the October vote. The bank points out that both local investors and corporate treasuries typically increase purchases of U.S. dollars when elections approach and the economic consequences are viewed as binary. That pattern - greater demand for dollars amid electoral uncertainty - is expected to continue into the election period.
Looking beyond the vote, Barclays anticipates that the real will regain ground once the election is settled. The bank expects the currency to reconnect with the external factors that generally influence emerging market exchange rates, restoring the link between Brazil's external position, relative real rates, and currency performance.
Context and timing
Barclays highlights a two-phase outlook: a near-term phase in which external balances and higher real rates support the currency, followed by an election-driven phase where dollar demand from local actors may weigh on the real. The bank places the point of transition in investor focus around mid-August, with heightened attention to the October presidential contest thereafter.
Implications
- Near-term support for the real is tied to external accounts and interest rate differentials.
- Political developments and election timing are expected to create currency pressure in the run-up to October.
- A post-election recovery is anticipated if the currency re-aligns with external drivers.