Dollar at R$6.00, long-term interest rates on the rise and more headaches for the Central Bank. This is the response expected from the Brazilian market if there is a Republican victory Donald Trumpaccording to economists and experts with whom the InvestNews talked over the last few days. The Republican’s victory scenario has been gaining more strength due to the latest electoral polls.
It is expected that in a world in which Republican Donald Trump wins the United States presidential election, there will be inflationhigher interest rates and dollars. And Brazil will not be able to escape contagion.
READ MORE: Trump’s eventual victory in the USA increases pressure on the dollar in Brazil
This prediction, almost consensual among economists, has already begun to manifest itself: in reaction to the former president’s advantage in electoral polls, interest rates TreasuriesAmerican public bonds, have risen in recent days, while the main currencies, including the real, have lost value. Gold, considered a safer asset for times of uncertainty, is also rising, as are American stock markets. This is what analysts are calling “Trump trade“.
The market reaction is based on the candidate’s main proposals presented during the campaign:
- Tax cuts – can be a stimulus for consumption and consequently, inflation;
- Deregulation of the economy – a strategy that meets the interests of some economic sectors, especially technology, and which can unlock business and contribute to economic acceleration;
- More aggressive tariff policy – by restricting imports, competition in many sectors tends to decrease and, as a consequence, prices;
- Immigration restrictions – fewer immigrants can mean less labor and, consequently, have effects on wages in some segments of the economy.
The Wall Street Journal: Why Trump’s promise to tax imports should be taken seriously
The set of measures proposed by the Republican has an impact on the supply of goods and services for the economy and should also stimulate demand. The result of this equation is simple: more inflation.
And for Brazil? “It’s the worst of all worlds,” he says Tony Volponadjunct professor at Georgetown University in Washington DC and former director of International Affairs at the Central Bank. The first point of contagion is via interest. Volpon explains that the economic stimulus promised by Trump could cause a problem for the Federal Reserve (Fed, the American central bank) similar to what Brazil is experiencing.
READ MORE: ‘Trump effect’ could be worse for the world than for the United States
Now, the Fed is in the middle of a rate cut cycle. But, if the Republican’s promises are fulfilled, the worsening of inflation expectations will force the American central bank to raise interest rates again in the future.
A new interest increase – or simply a pause in the rate fall – would have the power to change the direction of global money. “A scenario with Trump would tend to attract more capital, which would directly affect the exchange rate and also the stock markets,” says Volpon.
Today, emerging markets have been suffering from global interest rate dynamics. While in the United States the rate cut gave strength to shares, countries like Brazil are dealing with the negative effects of monetary tightening on the stock market. As a result, the average price difference between emerging markets and the S&P reached its highest level since 2021.
But some may take advantage of a Trump victory. According to a report by XP Investimentos, companies in the export sectors of commoditieslike agribusiness, could benefit from a Trump administration. It is an effect that was already observed in the period between 2018 and 2020, at the height of the trade war with China, when Chinese demand for commodities moved from the United States to Brazil, benefiting products such as soybeans and corn.
weaker real
The other side of the coin is the exchange. The dollar would tend to gain strength in the world, both due to the effect of American economic growth and the prospect of rising interest rates. The devaluation of the real could put even more pressure on inflation in Brazil. And it would pose an additional problem for the Central Bank, which has already faced difficulty in containing inflation.
Global markets are anticipating this scenario in a movement called “Trump trade“. This Tuesday, the commercial dollar rose again and closed at R$5.7610, the highest level since March 30, 2021. But does this mean that the market already takes Trump’s victory for granted? The answer is no: it is a protection movement, as market experts define.
In 2016, when Trump was elected, the market did not expect this result. Therefore, faced with a still uncertain scenario, investors prefer to take a preventative position. Experts’ calculations show that Trump’s proposals would add US$7.5 trillion to the country’s fiscal deficit – while an eventual Kamala Harris government would bring an additional US$3.5 trillion deficit.
READ MORE: The American debt bomb. And her fragments in Brazil
Trump’s victory is not entirely “in the price” – reflected in asset prices –, says Volpon. This means that you need to be prepared for an even more negative reaction if the Republican actually wins the election.
