FX.co ★ Brazilian Real Weakens Toward Early-August Lows

The Brazilian real approached levels around 5.56 per US dollar, revisiting lows from early August as investors re-evaluated the political risk premium necessary to maintain investments in Brazilian assets. This shift followed former President Jair Bolsonaro's endorsement of Flávio as his preferred presidential candidate, reigniting concerns regarding the nation’s policy direction and fiscal stability in the coming year. Such concerns prompted foreign investors to withdraw, led to a widening of FX premia, and left the outlook for policy implementation ambiguous. Earlier this month, the currency found some support from easing inflation data, with mid-month inflation in Brazil tapering to 4.41% in December—largely meeting expectations around 4.4% and remaining within the Central Bank's tolerance range of 1.5% to 4.5%. This data supported the disinflation narrative and contributed to a reduction in the inflation risk premium factored into the real. Concurrently, the US dollar weakened despite a solid 4.3% GDP growth in the third quarter, as markets continued anticipating Federal Reserve easing next year and the demand for safe haven assets diminished.