Commerzbank’s Michael Pfister argues that the Brazilian Real’s (BRL) strong run is likely to pause as fiscal expansion, renewed inflation pressures and a polarized election weigh on sentiment. Pfister expects higher USD/BRL levels in coming months before a softer US Dollar (USD) and post‑election clarity help the Real recover, with forecasts pointing to USD/BRL at 4.80 by end‑2027.

Real strength seen facing temporary setback

"Given that real interest rates remain near double digits, market expectations of unchanged key interest rates will be difficult to sustain. We therefore expect to see higher USD/BRL levels again in the coming months, until a weaker USD and the outcome of the election provide some relief by the end of the year."

"As we entered this year, only the most optimistic market participants were likely to have expected the BRL’s impressive strength from last year to continue, given the October election and the looming interest rate cuts. Instead of a weaker real, however, we have seen the opposite in the first five months: against a basket of currencies, the real is once again among the best performers and has only recently yielded ground to the Norwegian krone."

"A dilemma has arisen for the BCB: theoretically, it must adopt a more restrictive stance to offset the expansionary fiscal policy. At the same time, however, pressure for interest rate cuts is mounting in light of the approaching election and the fact that interest rates are already high. Although the BCB has adopted a more hawkish stance in recent years, we expect to see increased discussion among policymakers regarding the way forward."

"In light of the polarised election, mounting fiscal risks and uncertainty surrounding the central bank’s next steps, we anticipate that the BRL will lose some of its recent gains in the lead-up to the election. Although we have been warning about these risks for some time, they now appear to be materialising. But this weakness is unlikely to last long."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)