Brazil’s first-round election results trigger currency and stock rally on expectations of tighter fiscal policy

Brazil’s voters surprised markets on Oct. 4, with conservative challenger Flávio Bolsonaro performing more strongly than expected against incumbent president Luiz Inácio Lula da Silva. The real rallied by 4% against the dollar – the most since 2018.

Notably, the real’s surge occurred even as the greenback kept strengthening globally. Brazil’s main stock index surged almost 8%; benchmark government debt yields fell by more than a percentage point.

The market reaction is closely linked to the country’s fiscal situation and a perception that a Bolsonaro government is likely (and will favor more restraint). Since Lula defeated Bolsonaro’s father in 2022 and took office, Brazil’s government debt has risen from 56% of GDP to almost 70%.

This is mostly due to higher interest rates (even as the Banco Central do Brasil begins loosening policy) rather than a wider primary deficit. In the 12 months to June 2026, Brazil’s interest bill reached 7.3% of GDP.