Brazil's real jumps after Bolsonaro leads election first round

Brazil's real jumped more than 4% against the US dollar on Monday morning amid a strong showing in early trading, after right-wing Senator Flavio Bolsonaro outperformed private poll predictions and took the lead in Sunday's presidential election first round. Bolsonaro ‌and his chief rival, President Luiz Inacio Lula da Silva, were the frontrunners in a field of 12 candidates in a campaign dominated by concerns over the cost of living, corruption and crime.

The son of former President Jair Bolsonaro, who is serving a 27-year sentence for plotting a coup after losing the 2022 election, won 47% of the votes cast, exceeding polls, and will face Lula, who secured about 45%, in a runoff this month. Polls had forecast Lula would lead the first round of ‌voting by around three percentage points.

The real jumped past 5.00 per dollar, from around 5.22 previously, in line with analyst forecasts and with the currency's performance four years ago when the elder Bolsonaro did better than expected in the ‌first round vote. A Reuters poll published on Friday found the real could strengthen by as much as 4.6%, to 5.00, in the immediate aftermath of the vote if Bolsonaro won the first round.

Early trading also pointed to a strong start for Brazilian equities, with stock index Ibovespa futures soaring more than 8%. The Frankfurt-listed MSCI Brazil ETF jumped more than 16%, while overseas-listed shares of Brazilian companies including Itau Unibanco and Petrobras posted gains. Brazil's international debt also rallied, while broader fixed income markets were jittery. The 2056 bond was up 1.4 cents on the dollar to bid at 93.5 ⁠cents, Tradeweb data ​showed.

"We expect a strong rally across Brazilian assets," said Thierry Larose, ⁠portfolio manager at Vontobel. Bolsonaro has pitched himself to investors as a "more centered" version of his father, with a pro-market agenda including tighter public spending, privatizations and lower taxes.

"It remains to be seen whether Flavio Bolsonaro would ultimately prove more fiscally responsible than Lula would be in a fourth presidential term. ⁠However, markets are likely to give him the benefit of the doubt," Larose said. 'MARKETS WANT CHANGE'

Analysts also expect the real to continue strengthening into 2027. Societe Generale forecasts it will firm to 5.10 by end-2026, with scope to move below 5.00 in the first half ​of 2027. Morgan Stanley forecast the real could fall below 4.90 and toward 4.50 in the first quarter of next year. "The market wants change, it wants reform, it doesn't want a high public deficit; with the ⁠current government, all of this will continue," Pedro Galdi, investment analyst at the AGF Investments platform, told Reuters.

Four years ago, Brazil's currency strengthened more than 4% against the dollar and the benchmark Bovespa equities index jumped 5.5% the day after then-President Jair Bolsonaro's stronger-than-expected first-round showing against Lula. A similar move could unfold on ⁠Monday, ​said Ivo Chermont, chief economist at Quantitas.

"Investors will wake up on Monday to a very powerful rally across asset classes," Chermont said. "We're probably talking about the dollar falling somewhere in the 2% to 4% range, equities rising perhaps 4% to 6%, and both nominal and real interest rates tightening significantly." Bolsonaro's strong showing is likely to boost market confidence in the near term, said Bryan Harris, a managing partner at Sabio.

"The market will be looking for clear signals from Bolsonaro that he ⁠is serious about tackling the country's problems," Harris said. Jair Bolsonaro went on to lose to Lula in the second round and was subsequently convicted of trying to carry out a coup to overturn the result.

WARNINGS OF INTERFERENCE Lula allies warned ⁠before Sunday's vote that the Trump administration could refuse to recognize ⁠a Lula victory, citing a blocked US observer mission.

Trump did not formally endorse a candidate but has hosted Flavio Bolsonaro at the White House and praised him publicly. Others had warned of outside interference. Reuters reported last week that Brazilian intelligence briefed French and German officials on alleged US and Russian interference before the election, claims Washington rejected.