FX Daily: BRL set to suffer on surprise Lula win

The dollar should remain supported this week while Brazilian assets face a sharp correction after Lula’s unexpected election victory.

• The week combines the Wednesday FOMC meeting, third-quarter big-tech earnings, geopolitical events and several G10 central-bank meetings; firm energy prices and a more hawkish Fed support the dollar.
• The DXY is expected to remain between 101.45 and 101.85, unless disappointing Alphabet or Microsoft results trigger a sharp decline in US equities and push the index toward 101.25.
• Eurozone October flash PMIs were resilient, but France’s fiscal problems and the August current-account surplus of only €8.7bn argue for a 1-2% risk premium in the euro; EUR/USD upside is capped around 1.1250/70, with 1.1180 vulnerable.
• CEE currencies remain under pressure: Polish inflation is expected to fall from 4.1% to 3.7% year-on-year, Czech growth is forecast just below 2.0%, and EUR/PLN has broken above 4.400 while the zloty remains the region’s weakest link.
• Lula won Brazil’s runoff with 51.8% of the vote, while a 7-8% budget deficit and 70% net debt-to-GDP leave the country exposed; USD/BRL could open 5-7% higher near 5.20/25 and the Bovespa could lose double digits.

Takeaway: The authors favour dollar strength, a cautious stance on the euro and continued weakness in CEE currencies, while expecting an especially severe initial sell-off in Brazilian assets unless political acceptance of Lula’s victory calms markets.