Brazil’s currency slides after Lula wins a fourth term

What happened

Luiz Inácio Lula da Silva won Brazil’s presidential runoff on 25 October with about 51.8% of the vote, a lead of nearly 4.4 million votes over Flávio Bolsonaro, according to the electoral court. Bolsonaro had led the first round. Lula’s new term, his fourth, starts on 5 January 2027.

Brazilian markets were closed on Sunday, but trading elsewhere reacted at once. Futures on the Brazilian real in Chicago implied a fall of about 9–10% against the dollar from Friday’s close of about 4.98 reais per dollar, and a Tokyo-listed fund that tracks Brazilian shares fell more than 11% when trading opened in Asia. Sunday-evening futures trading is thin, and moves like these often shrink once the main market opens.

Why an election moves a currency

Many investors had positioned for a different result, seen as more likely to cut spending. When an outcome surprises them, they reprice the country’s assets quickly: they sell the currency and the government’s bonds, and demand more to keep holding them.

Brazil’s numbers explain why investors focus on the public finances. The IMF estimates government debt at about 97% of GDP this year and a budget deficit of about 8% of GDP. Most of that deficit is interest: with the central bank’s policy rate at 14%, Brazil pays about 7.8% of GDP a year to carry its debt, the highest of the ten countries we follow.

Where it sits in the chain

This is politics feeding into currencies and bond yields. Brazil is one of the few large economies where the interest rate on government debt is above the economy’s growth rate in money terms. In that situation, debt grows faster than the economy unless the government runs a surplus before interest. So any doubt about the budget shows up quickly in borrowing costs.

A weaker real adds a second effect: it makes imports dearer, which can push inflation up and keep interest rates high for longer.

What to watch

• Where the real and Brazilian bond yields settle once local markets open on Monday.
• Who Lula names to run the economy, and any signal on spending rules. Investors say that will decide whether the move lasts.
• The central bank’s next decision on the Selic rate.