The Brazilian real has softened to the weakest levels since the pandemic-era sell-off in early 2020, ING’s FX analyst Chris Turner notes.

USD/BRL to trade at 6.25 in 12 months

“If the real did not have enough to worry about with the threat of a global trade war, President Lula's foot-dragging on fiscal reforms is adding to the woes. Here his plans to raise income tax exemptions for the poor are eating into fiscal consolidation plans and leaving Brazilian assets on the ropes.”

“Overnight, it looks like the government has announced BRL70bn of spending cuts after all (there had been fears that this would be delayed), but let's see whether that is enough to stabilise the real. Additionally, in the back of investors' minds, is that 2026 is an election year and that the current fiscal laxity is just a warm-up to events in 2025.”

“In our recent USD/BRL update in FX talking, we revised our 12-month USD/BRL forecast to 6.25 which seems to be the direction of travel.”