Market roundup: U.S. dollar close to BRL 5 as investors give Lula a chance

Not exactly happy, but markets are giving Lula a chance

The first post-election trading week is over. Investors, especially foreign ones, have given President-elect Luiz Inácio Lula da Silva the benefit of the doubt. 

State of play. Contrary to expectations, Brazilian markets reacted positively to Lula’s win. Trading volume on the stock exchange rose, and the U.S. dollar plummeted against the Brazilian real — which became the best-positioned emerging currency in Latin America: rising 9.12 percent year-to-date, and 4.48 percent the past week alone.

Tension. Following the election, a series of roadblocks and demonstrations contesting Lula’s victory and calling for “federal intervention” (effectively a military coup) erupted. 

• Although President Jair Bolsonaro did not explicitly contest the election results – and that none of the protests devolved into violence – the demonstrations suggest Lula may not have a long honeymoon period ahead of him.

Obstacles. Coordinated by Vice President-elect Geraldo Alckmin, the transition team began uncovering the size of the hole in the government’s accounts yesterday. In an interview with Brazil Journal, former central banker Henrique Meirelles (whom markets would love to see as finance minister), said Brazil’s biggest challenge is to reconcile social promises made in the campaign with the 2023 deficit.

• “The most immediate solution is to create a very well-defined exceptionality for the year 2023 to secure, for example, Auxílio Brasil payments of BRL 600, followed by a cut in expenses and reforms,” said Mr. Meirelles, who believes that by presenting a clear economic policy, the new government will be able to gradually reduce the benchmark interest rate.

Yes,...