The Brazilian real had its strongest opening in months on Monday (5): the US dollar fell more than 4% at the start of trading and dropped back below R$ 5, its lowest level since April. By around 9:20 a.m., the dollar was down 4.59% at R$ 4.975, according to Folha de S.Paulo. For ordinary Brazilians, a weaker dollar tends to ease prices of imported goods and foreign travel, which track the exchange rate.
In concrete terms, US$ 100 that cost about R$ 521 at Friday's close was worth close to R$ 497 on Monday morning, a difference of more than R$ 20 in a few hours. According to g1, the dollar had already fallen nearly 5% over the year before Monday's session.
The trigger was Sunday's (4) first-round election result. Senator Flávio Bolsonaro (PL), son of former president Jair Bolsonaro, finished ahead with 47.03% of valid votes, against 45.16% for President Lula (PT), who is seeking reelection. The two meet in a runoff on October 25, and the tally defied most pre-election polls, which had pointed to a Lula lead.
Why an election moved the exchange rate
Investors charge a premium, extra yield, to lend money to governments they see as risky. Part of the market believes a potential Flávio Bolsonaro administration would run fiscal policy more tightly, keeping public debt under firmer control. That would lower the risk premium demanded on Brazilian assets and draw dollars into the country, pushing the exchange rate down.
The stock market reacted in the same direction. The Ibovespa futures contract, which signals where Brazil's main stock index will open, was up 8.43% at 9:05 a.m., according to InfoMoney. Abroad, a fund bundling Brazilian shares traded in Frankfurt gained more than 14%, and stocks such as Itaú Unibanco and Petrobras rose in New York.
BTG Pactual projects that, if Flávio wins, Brazilian stocks could quickly return to their ten-year historical average, implying an upside of 11% to 20%, according to Folha. Names floated for the senator's economic team, such as former Caixa president Daniella Marques, are well received by financial markets. Electoral history also feeds the bets: no runner-up in a Brazilian first round has ever reversed the result in a presidential runoff.