On Sunday, just a week after Luiz Ignacio Lula da Silva was sworn in as president, supporters of former President Jair Bolsonaro stormed Brazil’s Congress and other buildings against the outcome of the 2022 presidential election and the new administration. Analysts at Wells Fargo point out that despite political risk being typically elevated in Brazil, they believe Brazil’s “January 6 moment” will not have a long-lasting impact on local financial markets or the economy. They still see USD/BRL around 5.30 by the end of the first quarter.
Past weekend’s event unlikely to weigh on BRL
“Despite more elevated political risk, we maintain our view that the USD/BRL exchange rate can hover around BRL5.30 by the end of Q1-2023 and that the real can strengthen toward BRL5.00 by the end of this year. We also believe this past weekend’s events do not alter the course of Brazilian Central Bank (BCB) monetary policy, and we continue to believe BCB policymakers will initiate an easing cycle in Q3 of this year. And as far as the economy, our base case scenario is intact, and we believe Brazil’s economy will enter a mild and modest recession by the middle of this year.”
“In the near-term, we will be focused on the Lula administration’s reaction to the riots, especially since federal intervention is in place through the end of the month.”
“Over the medium-to-longer term, Lula’s fiscal policy will likely be the driving force of the currency. Should future fiscal policies result in a further erosion of fiscal responsibility, we would turn outright negative on the currency for all of 2023, and our BRL5.00 target would be adjusted to reflect an outlook for Brazilian real weakness through the end of this year.”
