Brazilian Real: To Resume Gains After Election Risks – Commerzbank

Despite the Brazilian real recently coming under pressure due to uncertainty surrounding the 2026 election outlook, foreign exchange analysts Norman Liebke and Michael Pfister at Commerzbank remain optimistic about its prospects. They believe that the Brazilian central bank's continued hawkish policy stance and still-high real interest rates will provide solid support for the real, and the decline triggered by election risks is unlikely to persist.

**Hawkish Central Bank Builds an Interest Rate Moat**

The analysts noted that the Brazilian central bank has been resolute in fighting inflation, allowing the real to enjoy a significant interest rate differential advantage. Against a backdrop of wavering policy paths among major global central banks, Brazil's high real interest rates continue to attract international capital seeking carry trades. As long as the central bank does not signal a dovish shift, a trend-like depreciation of the real is unlikely.

**Fiscal Risk Remains the Key Variable**

However, the institution also cautioned that fiscal policy remains a long-term burden for the real. Market reports indicate that concerns over Brazil's fiscal discipline have not dissipated, and any rumors of increased government spending could heighten exchange rate volatility. The recent pullback of the real from its year-to-date high reflects the market's preemptive reaction to the possibility that election speculation could trigger a fiscal policy shift. The analysts emphasized that the coordination of fiscal and monetary policy will be crucial in determining the real's medium-term trajectory.

**Short-Term Volatility Does Not Alter Medium-Term Trend**

Overall, Commerzbank believes the current correction is more of a brief risk-averse move driven by political noise. Once the election outlook becomes clearer, market attention will refocus on Brazil's highly competitive real interest rates. At the time of writing, the USD/BRL pair was trading around 5.21667, well below the 5.44 high touched earlier on election speculation, which appears to confirm the pull of interest rate differentials on the exchange rate.