ING’s Chris Turner says Brazilian assets are set to rally after Sunday’s presidential vote, where Flavio Bolsonaro secured 47% versus President Lula’s 45%. He expects markets to assume remaining votes lean Bolsonaro, sees currency and bonds benefiting from his fiscal austerity and deregulation agenda, and projects USD/BRL opening near 5.10, with a return to 4.90 seen as too aggressive.

Bolsonaro gains lift Brazilian assets

“Brazilian assets look set to rally today following presidential election results on Sunday, which showed Flavio Bolsonaro gaining 47% of the popular vote to President Lula’s 45%. Both will go to a run-off on 25 October, but markets will assume that the remaining 8% of the vote will be directed more towards the Bolsonaro camp. Investors had been expecting a very tight race, but it seems that Bolsonaro has performed better in the first round than many expected.”

“With Bolsonaro running on a ticket of fiscal austerity and deregulation, expect both the currency and bond market to rally. A few investors might be looking for the currency to replicate some of the sensational gains seen by the Colombian peso earlier this year, after the right-wing candidate, Abelardo de la Espriella, did well in the first round in May and then won the run-off in June.”

“Currently, however, the stronger dollar environment and surging US Treasury yields are creating a more difficult external environment for emerging market currencies than earlier this year.”

“USD/BRL could open near 5.10, but a move back to the lows of the year at 4.90 looks too aggressive right now.”