USD/BRL has come off sharply from its early August spike to 5.80, ING’s FX strategist Chris Turner notes.

USD/BRL set to struggle to break below 5.40/45 area

“The broad turn lower in the dollar and the global equity market recovery are helping. However, 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 prioritises 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.”