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Brazil FX: What’s driving the BRL’s underperformance?

International investors blame political uncertainty; locals view sell-off as weakening carry-trade dynamics.

The Brazilian currency has been underperforming its peer group of emerging-market currencies, falling by 5% against the dollar in the past month; the Russian rouble has fallen 7% in the same period due to the impact of US sanctions.

However, there is a divergence of opinion about what is driving this weakness.

Ilya Gofshteyn, LatAm FX strategist at Standard Chartered, told Euromoney on his recent visit to the region that international investors tend to believe the uncertainty about who will emerge as Brazil’s next president later this year is putting downward pressure on the BRL.

“I think about 90% of international investors read this current weakness as politics coming to the fore – that’s why they are worried and that has led to the bid for BRL coming down,” says Gofshteyn.

There is some evidence for this theory: despite former president Lula’s incarceration, he continues to lead local opinion polls – by a large margin – from the second-place Jair Bolsonaro, a right-wing populist.

The failure of a centrist, pro-reform candidate to gain any momentum could be worrying investors, as failure to enact pensions and other spending reforms early in the next administration would lead to huge budgetary pressures and a precipitous drop in international confidence that Brazil would meet its fiscal challenge – thereby potentially sparking a debt and currency crisis.

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