FX Weekly Overview (Brazil Issue)
Dollar expected to reflect optimism with the electoral race in Brazil and US inflation data
Leonel Mattos
- Currencies
FX Weekly Overview (Brazil Issue)
By: Leonel Mattos, Market Intelligence Analyst • BRAZIL PRS
Dollar expected to reflect optimism with the electoral race in Brazil and US inflation data
- Bullish
- Strong US inflation figures are expected to reinforce the perception of a more challenging inflationary scenario in the country, increasing bets on further interest rate hikes by the Fed in the short term and strengthening the dollar globally.
- Bearish
- The high expectation of a government change and a more conservative fiscal approach in Brazil may reduce the perception of risks in national assets, strengthening the Brazilian real.
The week in review
- During the week, the main event was the first round of the presidential elections, in which Senator Flavio Bolsonaro surprised by finishing the day ahead of Lula (47.0% x 45.2%), generating strong optimism for a government change and a new approach to economic policy.
- With the optimism, the dollar was once again traded below BRL 5.00 and recorded its largest drop in four years.
- In the external scenario, the dollar strengthened with concerns about the inflationary trajectory in the US and geopolitical tensions in the Middle East, but this was offset by domestic electoral optimism.
USD/BRL and Dollar Index (points)
Source: StoneX cmdtyView. Design: StoneX.
USDBRL variations | Daily: -0.75% | Weekly: -4.49% | Monthly: -3.67% | Annual: -8.97% | In 12 months: -7.25%
Dollar Index variations | Daily: +0.13% | Weekly: +0.32% | Monthly: +0.72% | Annual: +3.98% | In 12 months: +2.83%
KEY EVENT: Optimism with the electoral scenario
Expected impact on the USDBRL: bearish
On the first weekend of the month, the first round of presidential elections took place, where Senator Flavio Bolsonaro surprised by finishing the day in the lead with 47.03% of valid votes, compared to President Lula's 45.16%.
- In this context, investors are closely monitoring campaigns and voter intention polls for the second round, which should help calibrate expectations for the government and economic policy over the next four years.
- On Tuesday (13) and Wednesday (14), voter intention surveys by BTG Pactual/Nexus and Quaest/Globo, respectively, will be released.
- Additionally, on Thursday (15) Lula and on Friday (16) Flavio are scheduled to be interviewed nationally.
- Furthermore, the first debate of the second round is planned for this Sunday, though participation by both candidates has not yet been confirmed.
Why this matters: Flavio Bolsonaro's better-than-expected performance in the first round has significantly increased investor expectations for his victory in the second round.
- In practice, recent reactions from financial market agents reveal a preference for the election of a new president who might adopt a more conservative fiscal policy.
- Therefore, the prospect of a government change tends to reduce the perception of risk in national assets and favor the performance of the real.
Latest polls: On Thursday (08), Datafolha published its first voter intention survey for the second round between Flavio Bolsonaro and Luiz Inácio Lula da Silva after the first round of elections.
- According to the survey, Flavio recorded 49% of voter intentions compared to Lula's 45%, indicating a technical tie at the margin of error.
- Undecided and blank voters account for 1% and 5%, respectively.
- In terms of rejection, 46% of respondents said they would never vote for Lula, compared to 43% who ruled out voting for Flavio.
Tight elections: The narrow survey margins contrast with investors' perceptions that Flavio's chances of winning the second round are very high, a perception shared by the candidate's team.
- Even with the narrow lead, it has been reported that Flavio is already negotiating power-sharing with other parties for congressional leadership positions and ministries.
- However, it is important to highlight that enthusiasm can also be a factor that encourages voters, which becomes even more relevant considering the record level of abstention in the first round.
- Moreover, an unprecedented factor in these elections is that there will be a second round for governor in only five states and the federal district, fueling the perception of an already concluded electoral climate and potentially leading to higher abstention rates.
- In this context, the perception of tight elections remains, and both candidates are likely to focus their campaigns on demonstrating strength to convince undecided voters and encourage their presence at the polls.
Optimism for Flavio's election: Despite the tight scenario, there are factors that may favor investor optimism for Flavio's victory.
- The senator's numerical lead in voter intention polls may be a source of optimism for his campaign, though it remains narrow.
- Additionally, as electoral polls underestimated Flavio's performance in the first round, investors might perceive his chances of winning as higher than indicated by the polls, boosting optimism.
US Inflation Data
Expected impact on the USDBRL: bullish
US: Historical and expected interest rate trajectory – updated on October 9, 2026
Source: CME FedWatch Tool. Design: StoneX. Refers to the market's most probable interest rate futures bet on the indicated date.
In the external scenario, the currency market is expected to react to the release of the US Consumer Price Index (CPI) and Producer Price Index (PPI) for September, seeking to calibrate expectations for the trajectory of US interest rates.
Why this matters: Strong US inflation numbers are expected to reinforce the perception of a more challenging inflationary scenario in the country, increasing bets on further short-term interest rate hikes by the Fed.
- This, in turn, would raise the yield on US Treasuries and attract more foreign capital to the country, strengthening the dollar globally.
Estimates: The median estimates suggest that the CPI should accelerate from 0.4% in August to 0.6% in September, driven by higher fuel prices.
- The median estimate for the indicator's core, excluding more volatile food and energy components, anticipates its variation should slow from 0.3% to 0.2% during the period.
- Similarly, the median estimates for the PPI point to an acceleration from 0.4% in August to 0.5% in September for the full index and from 0.2% to 0.3% for its core during the same period.
Risk balance in the US: Inflation indicators gain significance amid a risk balance for the US economy that leans more toward inflation.
- Productive activity shows more robust expansion, driven by stronger personal consumption growth.
- Meanwhile, the labor market remains relatively stable at a healthy level, marked by reduced hiring, layoffs, and unemployment rates.
- Inflation, on the other hand, remains farther from the Federal Reserve's goals, stabilized at a level distant from the 2% annual target.
Inflation measures for the United States (%)
Source: US Bureau of Economic Analysis (BEA), US Bureau of Labor Statistics (BLS), Federal Reserve Bank of St. Louis. Design: StoneX.
Slower interest rate hikes: In practice, these indicators do not fundamentally change the risk balance faced by the Federal Reserve, which includes more heated productive activity, a resilient and healthy labor market, and more persistent inflation.
- However, milder figures for employment and inflation suggest there is no urgency for the Fed to make financial conditions more restrictive.
- This impression was reinforced by statements from senior Federal Reserve leaders, such as Vice Chairman Phillip Jefferson, New York Fed President John Williams, and Board Governor Christopher Waller, who advocated for a pause in October to gather more information about the economic environment before deciding on further hikes.
- As such, investors still anticipate an interest rate hike cycle, though at a slower pace and with slightly smaller magnitude.
INDICATORS
Sources: Central Bank of Brazil; B3; IBGE; Fipe; FGV; MDIC; IPEA and StoneX cmdtyView.
- Currencies
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