Rabobank Forecasts Brazilian Real Weakness on Narrowing Yields

Rabobank strategists Mauricio Une and Renan Alves expect the US Dollar to strengthen against the Brazilian Real (USD/BRL) to 5.35 by the end of 2026. The outlook reflects expectations of a narrowing interest rate differential between Brazil and global markets, alongside persistent domestic fiscal concerns during an electoral year. Despite a resilient performance by the Real, which recently saw the greenback trade near 5.10 Reals, the Dutch lender expects the Brazilian currency to face downward pressure as global and domestic dynamics shift.

The core driver behind the projected depreciation is the shrinking spread between local and global interest rates. The Central Bank of Brazil's Monetary Policy Committee (Copom) lowered its benchmark Selic rate by 25 basis points to 14.25% at its June meeting, marking its third consecutive quarter-point cut. However, the central bank's weekly Focus survey of private-sector economists shows that market expectations have anchored around a Selic rate of 14.00% by the end of 2026. This anticipated monetary easing, even if gradual, is expected to chip away at the high-yield carry trade advantage that has supported the Real.

Beyond interest rate differentials, Rabobank highlights a fragile domestic fiscal backdrop as a key headwind. Heightened spending concerns in an election year are expected to weigh on local assets, including the benchmark Ibovespa index (IBOV) and interest rate futures. As the US Dollar undergoes an expected global recovery, these combined domestic vulnerabilities are projected to drive the USD/BRL exchange rate upward by year-end.