FX.co ★ Brazilian Real Strengthens on Trade Outlook

The Brazilian real has appreciated to over 5.4 per US dollar, bouncing back from the two-month low of R$5.52 recorded on October 10th. This recovery is largely attributed to the easing tensions between the US and China, which have diminished the trade risk premium. Additionally, a generally weaker dollar and increased external demand are enhancing Brazil's short-term export outlook. Market sentiment has adjusted to a lower risk of significant tariff impositions, following indications of improved bilateral relations and preparatory discussions. This has lessened the chances of substantial trade disruptions that could affect the commodity flows vital to Brazil’s current account. Concurrently, the US dollar remains subdued due to the ongoing government shutdown and the rising probability of interest rate cuts by the Federal Reserve, which reduce dollar funding costs and promote investment flows into Brazil's higher-yielding assets. Furthermore, Brazil maintains its appeal with attractive real interest rates compared to its peers, while robust Chinese economic activities and higher commodity prices are expected to enhance export revenues.