UBS BB has revised their exchange rate predictions and argues the Brazilian Real is likely to be more favorable as the global monetary easing continues, and Brazil’s interest rates remain high.
Bank of America also forecasts that the fair rate for the dollar will be R$5.40 at the end 2025, and R$5.86 by the end 2026. This is higher than actual spot rates but below its previous estimates of R$5.80 and R$5.86 respectively.
In general, this revision indicates a more positive bias on local assets based on the external environment and the Brazilian monetary system.
The structural variables that influence the forecast
UBS BB’s fair-value model contains a variety of macroeconomic and financial structural elements.
The CRB Index measures external commodity prices, as do the results of a currency basket for emerging markets.
Banks also compare Brazil’s IPCA index of inflation to US CPI, and price discrepancies.
When these characteristics are considered in combination, they create an environment where the Brazilian real can benefit from external as well as local causes on the medium-term.
Global and Local Monetary Policy: Impact
The bank claims that the ongoing monetary ease cycle, especially in the United States and developed countries, is a major source of support to emerging markets currencies.
Brazil’s policy of restrictive investment is attractive to investors who are looking for better returns elsewhere.
UBS BB states that Brazil is expected to ease its monetary policy modestly.
Bank of America anticipates the domestic cycle to begin late in 2026’s first quarter or second, meaning that interest rates differentials will be substantial for some time.
Growth and dynamics of current account balances
Brazil’s current account deficit is still an issue. Brazil’s annual current-account deficit ranges between US$75 and US$80 Billion, or around 3,5% of the GDP.
This number is much higher than the historic average of 2.2%.
The economic growth that has been above trend is responsible for the growing disparity.
Brazil’s economic growth averaged 3% between 2022-2024. This is above the expected range of 2.5%-2.5%.
The Bank estimates the NAIRU at approximately 8%. This is also reflected in the labour market statistics. Unemployment ranges from 5.5% to 6.0%.
UBS BB says that it is logical to reduce the deficit in light of the economic downturn.
This ratio is expected to return to historical norms for the quarters ahead, and in 2026.
Volatility increases with the political cycle
Bank warns of volatility in exchange rates due to political events and elections.
Brazilians will be electing representatives to several levels including the state governments, 513 members of the Chamber of Deputies and two thirds of the Senate.
UBS BB’s real-time aggregator predicts that the upcoming cycle will be no different.
The outlook is not without risk
UBS BB said the risks are there, even if the outlook for the real estate has improved–macroeconomic uncertainties, such as GDP growth, inflation dynamics and possible deceleration of domestic activity.
External shocks such as global financial developments or movements in commodities prices could put downward pressure on the currency.
Investors, however, face problems that go beyond the economy.
The bank is focused on identifying and managing risks specific to each sector or company, especially for those firms that have significant exposures in emerging markets.
Exchange rate fluctuation, regulatory changes, social and political events, as well as sudden fluctuations in capital costs, could have a significant impact on valuations.
The spillover effect of emerging markets could create a perfect storm that would increase the risks for companies and industries dependent on global capital flows.
UBS BB has revised its forecasts for real estate to be more optimistic than previous estimates.
The global ease, the strong differentials in interest rates and the gradual adjustment of external accounts are all positive factors.
Brazil’s currency is also sensitive to domestic and international events.
Post UBS BB reduces exchange rate forecasts and sees a firmer reality on US easing, Brazil’s rates could be altered as new developments unfold
