In addition to the high carry, the more promising fiscal outlook and the trend towards a sustainable trade surplus are seen as supporting the Real. However, despite the optimistic short-term outlook for the BRL, we are more cautious in the longer term. Analysts expect inflation to remain well above the 3% inflation target in 2025. At the same time, the economy should benefit from the expected interest rate cuts, which could revive inflationary momentum.

We see a risk that the BCB may react less decisively than in recent months. This is supported by the government's continued criticism of high interest rates and a monetary policy-making body that is likely to be more pro-government in the future, at the latest when Neto's term at the head of the BCB ends in December 2024. We, therefore, expect the BRL rally to peter out in the coming months.