Commodity prices are an obstacle – ING

USD/BRL has fallen sharply from its peak in early August to 5.80. The broad decline in the US dollar (USD) and the global equity market recovery is helping, notes Chris Turner, FX strategist at ING.

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

“The commodity story is a concern for the Brazilian real. Brazil’s terms of trade fell to their lowest levels since January 2023 as weak Chinese demand hit 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.”

“Furthermore, investors await the Brazilian government’s 2025 budget plans – which are announced on August 31. The market view is shared 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 to keep the bond market on the side. Typically, fiscal weakness has always been the Achilles heel of Brazil’s asset markets. Given this event risk at the end of August related to lower budget and terms of exchange, we suspect that USD/BRL will struggle to break support in the 5.40/45 area.”