Societe Generale’s Dev Ashish flags growing election and fiscal risks weighing on Brazilian assets. BRL has underperformed in LatAm, with USD/BRL nearing its 200-day moving average at 5.2042 and Bovespa breaking below its long-term average. A sustained move above the 200-day would target 5.34–5.38, while a Lula fourth term with a divided Congress is seen as the base case.

Political risk clouds currency outlook

“Election risks weigh on Brazilian assets: The BRL is the main laggard in LatAm this month, with a negative total return of 1.7% contrasting with profits of around 2% for the CLP and MXN.”

“Our economist Dev Ashish assigns a 65% probability to a base-case scenario in which President Lula secures a fourth term alongside a divided Congress, a combination that could weigh further on the real.”

“USD/BRL is approaching the 200dma at 5.2042, while the Bovespa has already violated the long-term average after retreating to a seven-month low of 167k.”

“From a technical standpoint, a sustained break above the 200dma would open 5.34-5.38 in USD/BRL.”

“This is proof that investors are increasingly repricing election and fiscal risks ahead of the presidential vote, with some fund allocations possibly rotating toward the MXN as a relatively more attractive carry/ politically neutral destination.”