What’s behind the weakness in the real?

The sharp drop in the Brazilian real over the past month has, in our view, been driven more by local developments – including growing uncertainty over the outcome of October’s elections – than it has by a general deterioration in global risk appetite that has weighed on most EM currencies in recent weeks. The uncertainty generated by the election means that the path ahead is likely to be bumpy, but we expect the general trend over the next 12-18 months will be towards further weakness.