The next 12 months are expected to see Brazil’s real strengthening, but the currency is also expected to come under increasing pressure. This is because of the additional social spending that has been planned in the run-up to the elections in the country in October, despite the economic backdrop being quite tough.

Upside and downside

According to polls, the real is expected to rise by 3% against the US dollar to reach 5.24 in the next three months. In addition, it is expected to see a rise of 4% in a year from 5.41 on Wednesday to 5.20. However, analysts have said that the currency is going to see some weakness as well.

The most pessimistic of them said that the real would come down against the US dollar to a low of 5.80, which would erase all the gains that the currency has made since last year. Analysts said that there will be underperformance in the Brazilian real if additional fiscal measures are announced by the government for curbing consumer prices.

Aid package

Emergency rules were passed by Brazilian senators in the previous week, which allow payments to be made as part of a huge aid package. This step is considered a crucial one for the re-election campaign of the country’s existing president Jair Bosonaro.

Analysts said that the measures that have been announced could result in misallocation of the economic resources and would also affect public finances. Even though unemployment has come down significantly, there are still a lot of discontent because wages are not rising as quickly as consumer prices.

The Brazilian central bank claims that inflation numbers in the country will go down soon after it did most of its work where interest rates are concerned.

Other currencies

Ahead of the October election, Bolsonaro is lagging behind the former president of Brazil Luiz Inacio Lula da Silva. If elected, he is planning to get rid of the cap on government spending, control deforestation dramatically and introduce a new pricing policy for fuel.

As opposed to its peers in South America, the Mexican peso has reached a value of 20 against the US dollar and this has remained the currency’s convergence point since last year. It has remained at almost the same level in a year’s time.

Last week, central bank analysts hiked up their forecasts in a poll about the benchmark interest rate of the Bank of Mexico in this year. This offered support to the peso and allowed it to strengthen.

Brazil is not the only country dealing with rising inflation, as it has become a problem all over the world. Concerns about the global economy are weighing on central banks while they are hiking interest rates in order to combat inflation. The risks of recession have climbed higher because of this problem, but most central banks are adamant to continue their policy as they do not want inflation to last.

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