Lula and Flávio Bolsonaro Enter the Final Week Tied as Debate Turns on 250 Billion Reais in Spending Cuts

What this means

Investors in the Brazilian real and in the local-rate market are pricing the likely fiscal path of the next government, not the personal qualities of either candidate. A Bolsonaro win implies spending cuts that would let the central bank cut its very high policy rate sooner. A Lula win implies continued spending growth that keeps real rates high. Foreign holders of Brazilian local bonds and carry-trade positions are the most exposed. The currency's early-October move shows that a Bolsonaro win is partly priced in, so a Lula victory would cause the larger move. The consensus may underestimate one thing. Whoever wins must pass a budget through Congress, and Congress, not the president, decides how much of the promised 250 billion reais is actually cut. In 2002 the real weakened sharply before Lula's first victory and recovered after his "Letter to the Brazilian People" committed him to fiscal targets. The desk's read is that the result will move the real and local rates sharply in the week after October 25, and that within months the composition of Congress and the first budget proposal will matter more than the result. A winner who names a finance minister without a credible spending rule within weeks would turn any post-election rally into a sell-off.