FX.co ★ Brazilian Real Extends Losses on Fiscal Concerns

The Brazilian real weakened beyond 5.65 per USD in November, extending its lowest level since May of last year, after the government’s fiscal adjustment bill disappointed investors. While markets had initially welcomed the proposal as a first step toward a more robust fiscal agenda, they now see it as a modest and insufficient effort. Rather than tackling structural reforms needed to reverse the upward trajectory of public debt, the bill is viewed as mainly creating additional room for spending freezes to meet the 0.5% of GDP primary surplus target for 2027.

The government has come under market pressure to deliver credible fiscal measures ever since Brazilian assets slumped following President Lula’s reelection. At the same time, annual inflation rose to 4.63% in October from 4.58% in September, coming in below market expectations of 4.74% but still marking a four-month high and remaining above the central bank’s 4.5% target ceiling. With inflation persisting above target, the Banco Central do Brasil is expected to proceed cautiously before resuming its Selic rate-cutting cycle.