Brazilian real falls 12% as trading halted for 30 minutes after Lula wins
Key Facts
The Brazilian real fell 12% against the dollar in early spot trading on Monday, October 26, reaching 5.60 reais per dollar after Luiz Inácio Lula da Silva won, according to a Reuters report published by Investing.com. In the same session, B3 exchange triggered its circuit breaker and halted trading for 30 minutes after the index fell 10% from the previous close, Reuters reported. The shock came after the result defied market expectations and raised concerns about the country’s fiscal position, according to the report. The halt covered assets traded in the spot market, private fixed income, options linked to shares, receipts and indices, and exchange-traded funds. Reuters said the last time the exchange had to activate the mechanism was in March 2020.
The daily exchange rate reflects the broader move, differing from the early intraday decline reported by Reuters. The dollar rose against the real from 4.9652 at the October 23 close to 5.4576 at the October 26 close, according to daily closing data provided by EL7. This means the currency closed the period at a weaker level against the dollar, while the early move took it to 5.60 per dollar. Before the election’s second round, the picture was the opposite in equities and currencies: the Ibovespa index closed Friday about 7% above its level before the first round, and the real was about 5% stronger against the dollar over the same period, according to Reuters via MarketScreener. The report said the gains ahead of the second round reversed as the result emerged.
The reaction was attributed to investors’ positioning for a different outcome and concerns about public finances. Reuters, via UOL, said the result defied market expectations and raised concern about the country’s fiscal position. Investors had positioned for a win by Senator Flávio Bolsonaro and saw a change in government as a possible improvement in the public accounts, according to the same report. After Lula won, DI contract yields initially jumped by more than 300 basis points, signaling a sharp repricing in the interest-rate market, Reuters reported. Brazilian five-year sovereign credit default swaps also rose to 151.67 basis points on October 26, from 120.21 basis points at the close on Friday, October 23, based on S&P Global Market Intelligence data cited by Reuters. The market reaction documented in reports thus extended from currency and equities to the cost of hedging sovereign credit risk and debt pricing.
Political tension over the election result preceded the market shock. The Associated Press said Flávio Bolsonaro refused to concede the result and called for it to be annulled by Monday morning. The call came as markets had positioned for the possibility of his victory, according to Reuters’ account of investor positioning and expectations. On the fiscal front, Brazil’s Treasury canceled the inflation-linked and fixed-rate bond auctions scheduled for Tuesday and Thursday of the week beginning October 26. It kept the auction of securities linked to the Selic benchmark rate, scheduled for Tuesday, Reuters reported, citing the Treasury. The decision highlights a change to the debt issuance calendar following the sharp market move, while one of the scheduled auctions remains in place.
Brazil’s Treasury said it would continue to monitor market conditions and intervene to ensure the proper functioning of the government bond market and related assets, according to the statement Reuters cited via UOL. Meanwhile, Reuters said investors’ attention would turn to Lula’s choice of finance minister and what the appointment might reveal about his fiscal approach. The focus is also on whether the government will present a clear and credible path to fiscal discipline, an issue coverage linked to investors’ concerns about public finances. The auctions that were retained or canceled remain part of the week’s immediate picture as the market awaits fiscal policy signals from the expected appointment. The report did not specify when the finance minister would be announced.