UBS BB cuts exchange rate forecasts, sees firmer real on US easing and Brazil’s rates

UBS BB revised its exchange rate forecasts and argues that the scenario is more positive for the Brazilian real as global monetary easing progresses, while Brazil continues to offer high domestic interest rates.

The bank also sees a fair value of R$5.40 per US dollar at the end of 2025 and the end of 2026, which is higher than the actual spot rate but lower than its earlier forecasts of R$5.80 in 2025 and R$5.86 in 2026.

Overall, the revision implies more positive bias for local assets on external conditions and given the domestic monetary bias in Brazil.

Structural variables behind the forecast

UBS BB's fair value model includes a number of structural macroeconomic and financial elements.

These include the current account balance and net external liabilities as a percentage of GDP, external commodity prices as measured by the CRB index, and the performance of an emerging market currency basket.

The bank also considers nominal interest rate differentials between Brazil and advanced countries, as well as price level discrepancies and projections, specifically comparing Brazil's IPCA inflation index to the US CPI.

These characteristics, when considered together, lead to an environment in which the Brazilian real may profit from both external and local causes in the medium term.

Impact of global and local monetary policy

According to the bank, the continuous monetary easing cycle in developed economies, particularly the United States, has been a significant source of support for emerging market currencies.

With lower US interest rates, investors are encouraged to seek better yields elsewhere, and Brazil's restrictive policy presents appealing options.

UBS BB notes that Brazil's monetary easing is projected to be modest.

The bank anticipates that the domestic cycle will not begin until late in the first or second quarter of 2026, implying that substantial interest rate differentials would endure for some time.

Current account dynamics and growth

Brazil's external accounts are still a concern. The annual current account deficit is between US$75 billion and US$80 billion, around 3.5% of GDP.

That number is significantly higher than the historical average of 2.2 per cent.

This growing gap is associated with an economic expansion that is well above trend.

Brazil’s economy grew by 3% per year on average between 2022 and 2024, a figure above the estimated potential growth range of 2%-2.5% for the country.

This can also be seen in labour market statistics, where unemployment is in 5.5% to 6.0% range against the Bank's estimate of the NAIRU, of approximately 8%.

According to UBS BB, it makes sense for the deficit to tighten in the face of the current economic slump.

The bank expects this ratio may revert to the historical average range for quarters further ahead and for 2026.

The political cycle increases volatility

The bank warns that political events, particularly the 2026 elections, will cause volatility in the exchange rate.

Brazilian voters will elect representatives at several levels, including state governments, the 513-member Chamber of Deputies, two-thirds of the Senate, and the presidency.

Election cycles have historically caused instability in financial markets, and UBS BB's real-time aggregator of volatility indicators predicts the same in the approaching cycle.

Risks to the outlook

UBS BB said the risks are there, even if the outlook for the real estate has improved—macroeconomic uncertainties, such as GDP growth, inflation dynamics and possible deceleration of domestic activity.

The currency could also face downside pressure from external shocks, from global financial events to movements in commodity prices.

For investors, though, the problems go beyond the general economy.

Sector and company-specific risks are at the top of the bank's agenda, particularly for firms with significant emerging market exposures.

Valuations could be significantly impacted by exchange rate fluctuations, changes in regulations, sociopolitical events and sudden movements in the cost of capital.

Moreover, spillover effects of other emerging markets might create the perfect storm, raising the risk for global capital flow-dependent companies and sectors.

UBS BB's revisions are more bullish for the real than the previous projections.

Despite lingering structural vulnerabilities and latent political risks, both global easing and the respective strong interest rate differentials and gradual external account adjustment make for a favourable backdrop.

Yet the 2026 election cycle and the possibility of a volatile emerging market will probably continue to have investors on alert, and, with its currency sensitive to both domestic and external events, Brazil's currency will too.