Brazilian Real: Rate cuts may support BRL against US Dollar - Societe Generale

Societe Generale strategists observe that the Brazilian Real (BRL) largely ignored softer inflation data, which still supports a Banco Central do Brasil (BCB) rate cut in September followed by a pause into elections. A broader easing cycle could attract bond inflows and support the BRL, with USD/BRL expected to remain in a narrow range and key support around 5.05/5.04 highlighted.

Soft inflation supports easing cycle

"In Latam, the BRL largely ignored friendly inflation data which keeps the BCB on track to lower rates in September. We think a pause then follows into the election. Mid-August IPCA inflation decelerated to 4.24% from 4.52% in mid-July."

"Our economist points out that disinflation was broad-based except for household goods and communication. The decrease -0.4% mom was the largest in four years and could be indicative of weakening demand alongside food price normalization."

"The downside surprise should cement a cut by the BCB next month and opens perspectives for a longer easing cycle which would be a fillip for bond portfolio inflows and the BRL. The 10y BRLGB yield has come down to 14.50% from 14.80% earlier this month. Medium-term inflation expectations are likely to remain closely tied to election outcomes."

"The BRL could also draw support from the country’s foreign trade and agri export position if El Niño causes disruption to global harvests"

"Banxico raised its GDP growth forecast for 2026 to 1.5% from 1.1% and moved back the timeline for inflation to reach the 3% inflation target to 4Q27 from 2Q27 in its quarterly report yesterday."

"For USD/BRL, the narrow range may prevail in the short term as investors choose to carry light exposure until after the presidential vote; the low achieved earlier this month around 5.05/5.04 is key support."