Brazil’s electoral outlook remains quite uncertain and analysts at Nomura see potential for binary market scenarios.
Key Quotes
“The composition of the second-round runoff is a key element.”
“Recent polls showed growing support for former-president Lula and possibly a higher probability of a PT vs Bolsonaro second-round – which would be market negative, in our view.”
“The market-friendly candidate, Geraldo Alckmin (PSDB), will enjoy the most TV time and this has long been viewed as a potential boost to his polling numbers, which have been poor.”
“BRL has moved to price in approximately 25% and 75% probabilities of “optimistic – market friendly” and “pessimistic – market unfriendly” scenarios (from 50%/50% by midAugust).”
“The most market-positive run-off combination would be Bolsonaro versus Alckmin. In such a scenario, we would give Mr. Alckmin the edge to win (70%) and, consequently, we would expect the market to react initially with a rally of ~13.5% in BRL and a rally close to 100bp in the long end and belly of the DI curve.”
“The most market-negative run-off combination for markets (of the possibilities that we think are more likely) would be Bolsonaro versus a PT candidate. We think the initial reaction would be a 4.0% sell-off in BRL, 30bp in Jan 25 DI and 28bp in Jan 23 DI.”
“Despite the above-mentioned results we prefer to take a cautious approach and wait for developments in the polls. In the meantime we maintain our long USDBRL exposure.”
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