Brazilian Real: Fiscal Risks Point to Weakening vs Dollar - Rabobank

Rabobank strategists Mauricio Une and Renan Alves noted in their latest analysis that slowing US inflation and cooling labor market data are giving the Federal Reserve more time to assess its monetary policy path. While this external environment has temporarily eased some pressure on emerging market currencies, it does not change the structural headwinds facing the Brazilian Real.

**Fiscal Risks Become the Core Drag**

The two strategists focused their attention on Brazil's domestic situation. They expect the Real to weaken against the dollar by year-end. In recent market performance, the Real recorded an appreciation of approximately 0.48% in weekly trading, ranking eighth among 24 emerging market currencies, but this short-term rally is considered unsustainable. Market reports indicate that rising election-related uncertainty and fiscal risks continue to pressure Brazilian assets, with the dollar/Real exchange rate approaching key technical levels.

**External Environment Provides a Buffer but Not a Reversal Signal**

On the US side, Rabobank's analysis confirmed signs of easing inflation, which buys the Fed more time rather than immediately triggering a policy shift. Meanwhile, volatility in global energy markets has not been eliminated, and external risk premiums persist. Under these circumstances, the Real lacks a foundation for sustained strength and is instead more vulnerable to shocks from the confluence of internal and external risks. At the time of writing, the dollar/Real exchange rate stood at 5.20617, a notable depreciation from the 5.0587 level previously observed by Rabobank, reflecting growing bearish sentiment toward the Real in the market.