FX.co ★ Brazilian Real Drops to Lowest in 8-Weeks

The Brazilian real has weakened, falling beyond 5.45 per US dollar to its lowest in eight weeks. This decline is attributed to uncertainty surrounding the timing of Brazil's interest rate cuts, political disruptions affecting fiscal credibility, and the allure of more attractive foreign yields. In November, the annual headline inflation rate eased to 4.46%, marking its lowest since September 2024. This development improves the prospect for future rate cuts but is insufficient to guarantee them, keeping the Brazilian Central Bank (Copom) likely to maintain the rate at 15% and leaving market participants debating the timing of any easing. Political risks have resurfaced, with the re-emergence of the "Flávio Bolsonaro risk." Concurrently, congressional efforts to reduce sentences for those involved in the events of January 8 have reignited concerns about the stability of market-friendly opposition and the broader fiscal outlook. Meanwhile, elevated US Treasury yields have increased the opportunity cost of holding reais, complicating efforts to assess the pace of easing by the Federal Reserve and adding risk to investments in high-yield emerging markets.