BlackRock sees fiscal issues, elections holding more sway over exchange rate

“What’s more important is entering a process where you reduce the embedded risk in assets, which will allow you to lower the real’s carry without driving investors away from the country,” Mr. Goldberg said in an interview with Valor. “What’s really high right now is not just the interest rate differential, but the risk that these high rates need to compensate for [in order to keep the currency anchored].”

When analyzing the impact of interest rate differentials on the domestic exchange rate, Mr. Goldberg explains that the real’s anchoring through high rates is a gradual, day-to-day process—while a single piece of news that worsens the perception of risk can sharply devalue the currency in just one session.

“There’s a well-known saying: currency appreciation goes up like a staircase, step by step, but depreciation goes down like an elevator, all at once. Carry alone gives the currency a purpose, but high interest rates don’t justify themselves.”

“We usually think in terms of ‘carry to risk’—the interest rate differential adjusted for risk. The higher the risk, the higher the carry. Today, the real offers good carry for the associated risks,” says the BlackRock manager, who maintains a constructive view on the Brazilian currency in the short term.

Due to the real’s characteristics, Mr. Goldberg sees no obstacles to its continued appreciation in the near future. “Besides the carry, valuation is favorable [for the real]. The Brazilian exchange rate is not overvalued, so fiscal matters, elections, and the monetary policy cycle will determine Brazil’s weight in global portfolios,” he explains.

Regarding the electoral cycle, Mr. Goldberg says that with fiscal issues in focus, any candidate who, during the campaign, signals an intent to ease the country’s debt trajectory will automatically become the market favorite. “I won’t name names, but I think those who provide the market with confidence that this particular area of policy will be well managed will do well.”

On Brazil’s monetary policy cycle, Mr. Goldberg aligns with market consensus and sees little room for further rate hikes, with the remaining question being when the Central Bank will begin cutting the Selic. “The current level of restriction [from the rate] is significant. But the economy still hasn’t responded as one might expect at this level of restriction. Perhaps that’s due to fiscal factors,” he says.

“Although inflation expectations are falling, they’re still significantly above the Central Bank’s target, so I don’t expect a sharp monetary easing any time soon—unless the economy slows very quickly, which also seems unlikely,” he adds. Mr. Goldberg believes the first rate cuts could come at the end of this year or possibly only in 2026.

Not knowing exactly when the Central Bank will cut rates doesn’t mean investors should stay away from the interest rate market, Mr. Goldberg argues. “It’s not just about when rate cuts will begin, but about the market pricing in the DI [interbank deposit] curve,” he says. “Those building positions now are betting rates won’t go higher, and they’re collecting yield for that. It’s more about earning carry than capital appreciation for now.”

BlackRock does not detail its allocations, but Mr. Goldberg says he favors Brazilian positions in sovereign bonds, corporate bonds, and the currency itself. He believes Brazil—like other emerging markets—could benefit from global investors diversifying away from U.S. assets due to a number of factors.

“I’m not saying global assets are now more attractive than U.S. assets, but compared to before, there’s been a small decline in the ratio between non-U.S. and U.S. assets,” he notes.

Mr. Goldberg attributes this shift to uncertainties around Donald Trump’s trade policies and their potential effects on the U.S. economy (whether through inflation or a slowdown); the challenging position the Federal Reserve may find itself in as a result; the growing belief that artificial intelligence and tech are not exclusive to the U.S.; and America’s own fiscal situation, which could prompt global investors to seek safe-haven alternatives to U.S. Treasury bonds.