BRL: Commodity prices are a drag – ING

USD/BRL has come off sharply from its early August spike to 5.80. The broad turn lower in the US Dollar (USD) and the global equity market recovery are helping, ING’s FX strategist Chris Turner notes.

USD/BRL set to struggle to break through the 5.40/45 area.

“The commodity story is a worry for the Brazilian real. Brazil's terms of trade have dropped to the lowest levels since January 2023 as weak Chinese demand weighs on both soybeans and iron ore – two of Brazil's key exports. Brazil's terms of trade levels are more consistent with USD/BRL trading at 5.70/5.80.”

“In addition, investors await the Brazilian government's 2025 budget plans – which are announced on 31 August. The market view is split here. If the Lula administration prioritizes social spending, then fiscal targets will be missed and the real will be hit hard.”

“However, some in the market suspect that the government will cut spending to try and keep the bond market on side. Typically, fiscal weakness has always been the Achilles heel of Brazilian asset markets. Given this late August event risk with the budget and the terms of trade drop, we suspect USD/BRL will struggle to break support in the 5.40/45 area.”