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Gustavo Rangel, Chief Economist at ING, explains that Brazil’s election results diverged materially from the latest polls, with a strong anti-establishment wave helping unseat many traditional forces.

Key Quotes

“The most surprising element of this weekend’s elections in Brazil was the stronger-than-expected anti-establishment bias, which prevailed in many races, particularly in the populous Southeast.”

“The anti-establishment wave mirrors similar developments across the world, and reflects, in Brazil’s case, the economic recession and the deep discontentment with the political class, amid the widespread corruption brought to light by the Lava-Jato investigations.”

“Overall, this result leaves Bolsonaro with strong momentum heading into the second-round, on 28 October. It also suggests that second-round simulations, which indicated a tie between Haddad and Bolsonaro, probably slightly underestimated Bolsonaro’s support.”

“We continue to think that Bolsonaro has an edge, judging by the election result and the fact that popular enthusiasm with his candidacy should more than compensate for Haddad’s somewhat broader appeal.”

“We continue to expect the Brazilian real (BRL) to trend with a constructive (but still volatile) bias, with some risk of the USD/BRL temporarily dropping below our year-end forecast of 3.7. But given the sharp rally that has already occurred, room for additional BRL appreciation is more limited.”

“We also continue to expect the central bank to keep its policy rate on hold this year, despite the more hawkish guidance recently adopted.”