Brazil seen holding rates as US Fed expected to deliver 25 bps cut

Brazil is expected to maintain its Selic rate at 15%, diverging from an anticipated 25 basis point cut by the US Federal Reserve, a move that has significantly shifted investor positioning. Amid this policy divergence and improving Brazilian macro outlook—with 2025 inflation projections lowered to 4.79% and GDP growth seen at 2.28%—a recent survey shows 68% of managers are now long the Brazilian Real, up sharply from 41%. This reflects increased investor appetite for emerging market assets and Brazil's economic resilience.

Analysis

A significant divergence in monetary policy is underway, with Brazil's central bank expected to maintain its restrictive Selic rate at 15% while the US Federal Reserve is anticipated to deliver a 25 basis point cut. This policy differential, coupled with an improving macroeconomic backdrop in Brazil, is fundamentally reshaping investor positioning. According to a survey by XP, speculative long positions in the Brazilian real have surged, with 68% of managers now holding a long view, a sharp increase from 41% in the prior survey. This shift is supported by both global and domestic factors: the Fed's easing cycle, reinforced by soft US labor data showing August payrolls at 22,000 versus 75,000 expected, is weakening the dollar, while Brazil's outlook shows resilience. Manager pessimism towards Brazil's economy has plummeted from 73% in March to just 18%. Furthermore, 2025 inflation projections for Brazil have moderated to 4.79% and GDP growth is forecast at a stable 2.28%, reinforcing the case for the real's strength. While the current 15% Selic rate is set to hold, managers have lowered their year-end 2026 projection to 12.25%, signaling that while policy remains tight for now, an easing cycle is anticipated in the long term.

Key Decisions for Investors

• Consider long positions in the Brazilian real (BRL) against the US dollar (USD) to capitalize on the widening interest rate differential and strongly positive investor sentiment.
• Evaluate exposure to Brazilian local currency government bonds, as the high nominal Selic rate of 15% combined with falling inflation expectations offers an attractive and improving real yield.
• Monitor forward guidance from both the US Federal Reserve and Brazil's central bank, as any deviation from the expected policy paths, particularly a more hawkish Fed or a faster-than-expected Brazilian easing, could unwind the currency trade.