Gustavo Rangel, Chief Economist at ING, suggests that polls are likely to be the main domestic drivers for Brazil’s local assets going forward.
Key Quotes
“The chief market assumption is that Alckmin will rise in polls once the TV/radio ads start airing on August 31. But the longer it takes for the candidate to rise, the more anxious investors are likely to become.”
“We agree that Alckmin’s voter support should increase but we still find it unlikely that investor conviction about his victory will solidify. Our base-case assumption is that at least four candidates should remain competitive until October 7, keeping uncertainty elevated until the end.”
“Lack of clarity that an investor-friendly candidate will win should weigh on local assets, intensify demand for FX hedge and trigger a BRL selloff towards the 4-4.20 range during September/October.”
“The central bank still has much ammunition (at least about US$50bn) to intervene in FX markets and alter the BRL’s trajectory.”
“After record-levels of intervention in June (when the CB sold US$37bn in FX swaps), the bank took advantage of the improved market environment in July and did not intervene, effectively saving some ammunition for later. As a result of intervention uncertainty, a more precise FX trajectory remains hard to predict.”
“Post-October 7 and before the second-round on October 28, local assets will react to the election result and second-round poll simulations.”
“Any scenario in which Alckmin fails to move to the second round is bound to weigh on local assets. Bolsonaro’s economic agenda is pro-market, but the candidate is also seen as more vulnerable in second-round simulations while lingering questions about his conviction on his economic programme and his ability to execute it suggest greater caution.”
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