Brazil's Real: Rate Cuts Could Support BRL vs USD - Societe Generale

Strategists at Societe Generale note that the Brazilian real has remained largely unaffected by recent soft inflation data, which is reinforcing market expectations that the central bank will cut interest rates at its September meeting. The bank believes this policy outlook could provide support for the real's exchange rate.

**Rate Cut Expectations a Short-Term Positive**

Although easing policy typically weakens a domestic currency, Societe Generale strategists argue that in the current environment, the start of a rate-cutting cycle by Brazil's central bank could instead support the real. This is because rate cuts would help alleviate market concerns about a hard landing for Brazil's economy while maintaining its interest rate differential advantage over other emerging market currencies. According to the bank's analysis, the Brazilian central bank is expected to cut rates in September, followed by a pause ahead of the October municipal elections.

**Election Risks Cap Upside**

However, the real's potential gains may be limited. Societe Generale strategists also warn that upcoming election risks are threatening the appeal of carry trades in Brazilian assets. On the technical front, USD/BRL has formed higher lows, with the bank's upside target set at the 5.34-5.38 range. The current exchange rate is trading near 5.14872, leaving some room before reaching that target zone.

**Central Bank's Cautious Stance Offers Limited Support**

The Brazilian central bank's previous policy path has already reflected its cautious stance. According to reports, the bank cut the Selic benchmark rate by 25 basis points to 14.0%, as expected. Societe Generale analyst Dev Ashish noted that this cautious easing pace provides relatively limited support for the real, with market focus shifting to the risk premium stemming from election uncertainty.