Newsletter · · Ashutosh Agarwal

Brazil's Real Rallies on the Election as the Dollar Breaks Out - EM FX Weekly - Week of October 6, 2026

EM FX Weekly for the week of October 6, 2026 (podcasts published September 29 to October 6): Flávio Bolsonaro's 47% to 45% first-round lead over Lula gave the Brazilian real its biggest one-day gain since 2022 and sent EWZ to its highest since February 2020, the dollar index climbed above 102 despite a 29,000 jobs print, J.P. Morgan's FX desk said carry positioning is not crowded and told clients to fund in euros rather than Swiss francs, MUFG described a forced liquidation of Mexican peso longs, Marc Chandler named 102.85 as his dollar-top level, and Nomura put 70% odds on an RBI hike.

EM FX Weekly

Week of October 6, 2026: Brazil's Real Rallies on the Election as the Dollar Breaks Out

Last Friday, investors got the weak US jobs number they had been hoping for. The dollar went up anyway.

Employers added just 29,000 jobs in September. Wage growth fell to a five-year low. The market all but gave up on a Fed rate hike this month. In normal times that combination knocks the dollar down. Instead, by Monday the dollar index (a measure of the dollar against six major currencies) had climbed above 102. That is its highest level since early 2025. The euro slid through $1.12 because France's bond market is coming apart.

Then, on Sunday, Brazil voted. Flávio Bolsonaro, the son of the former president, did better than the polls expected and forced a runoff against President Lula on October 25. By Monday the Brazilian real had made its biggest one-day gain against the dollar since 2022. Brazil's main stock ETF hit its highest level since February 2020.

So this week's split is clean. The dollar is strong because America's economy and interest rates still look stronger than everyone else's. But inside emerging markets, investors are sorting countries one by one. Brazil got a reason to rally. Mexico is still paying for being the most popular trade of the year. India is about to raise interest rates. And J.P. Morgan's currency team says the carry trade isn't dead yet.

TL;DR

  • Brazil's election is the biggest emerging-market currency story of the week. Saxo's John Hardy put the first-round result at Bolsonaro 47%, Lula 45%. CNBC reported the real's biggest move against the dollar since 2022, with the EWZ fund at its highest since February 2020. Eurasia Group's Ian Bremmer said "this rally has legs" because most third-party votes lean right.
  • A Brazilian economist laid out the stakes before the vote. Luciano Sobral of Neo Investimentos called it a "binary election." If Flávio wins, he expects a Colombia-style relief rally (Colombia's currency strengthened about 20% after its right-wing win). If Lula wins: "just go crazy and buy as many dollars as you can."
  • J.P. Morgan says carry positioning isn't crowded and the trade can continue. Strategist Patrick Locke: "I don't think positioning is wrong way for... carry trades to... continue here." The firm still prefers the Australian dollar and Norwegian krone. Its new advice is to borrow in euros instead of Swiss francs.
  • MUFG sees the opposite risk. Swings in emerging-market currencies have jumped more than in rich-world ones. MUFG said that triggered "a forced liquidation of those elevated peso positions" in Mexico.
  • The dollar is breaking out, but one veteran is watching for a top. Marc Chandler of Bannockburn Capital Markets says the dollar index is up about 3.6% since mid-September. His level to watch is 102.85, halfway back from the 2025 high. Near there he thinks the risk-reward for owning dollars "changes."
  • The threat of a US diesel export ban, a key risk for Mexico and Chile, has eased for now. NAB's Taylor Nugent said the G7's 100 million-barrel stock release is being read as warding off the ban. J.P. Morgan noted Chile relies on US imports for more than 70% of its diesel.
  • India's central bank is expected to start hiking this week. Nomura's Sonal Varma puts a 70% chance on a 0.25-point rate increase. She sees a 50-basis-point cycle in total, against roughly 125 points priced by the market.
  • The Mexican peso gave back all of 2026's gains in one month. On MexMoves, the hosts said it went from about 16.85 per dollar to over 18 in September, while Banxico held at 6.5%.

What's new

Brazil: a right-leaning surprise, and the real's best day in four years

The most important result for emerging-market currencies this week came from Sunday's first-round vote in Brazil.

On Saxo Market Call ("Rough seas, but calm sailing for equities?", October 5), Saxo Bank's John Hardy gave the numbers. The result was "stronger than anticipated than many of the polls showed for Bolsonaro. 47% versus Lula's 45%." Nobody crossed 50%, so the race goes to a runoff on October 25. Hardy expects Flávio Bolsonaro to pick up most of the remaining votes, so "you'll see a much stronger Brazilian real and much stronger Brazilian stock market." His reason: "Bolsonaro, of course, is seen as more market-friendly."

The market moved the way Hardy expected. On CNBC's Squawk on the Street (11AM hour, October 5), reporter Seema Modi said:

  • The currency: the real was "outperforming its biggest move against the dollar since 2022."
  • Stocks: EWZ, the main US-listed Brazil stock fund, hit "its highest level since February of 2020."
  • History is on the leader's side: "Citi analysts noting that no candidate who finished first in the first round has gone on to lose the runoff."
  • Interest rates: Brazil's policy rate is "right around 13 percent" but has been coming down this year. That makes Brazil unusual while other countries are still raising rates. The hope is that a Bolsonaro government would "continue to push for lower rates."

Eurasia Group's Ian Bremmer then explained on the same show why he thinks the move will last. "It's very likely that Bolsonaro ends up winning in the second round because the third-party candidates that didn't make it are almost all to the right." Markets like Flávio, he said, because unlike his father "he's a political operator. He's very comfortable with big business," and he's "seen as someone who will... be much tougher on fiscal balance." Bremmer's verdict: "from a strictly market perspective, I think this rally has legs."

Not everyone sees it as settled. Before the vote, Reuters' Brendan O'Boyle said on Reuters World News (October 4) that polls for the runoff showed an "extremely close race, statistically tied."

The best explanation of why the real moves so much on this vote came from an episode recorded before it. On Explaining Brazil ("Brazil's economy is growing. So why isn't Lula polling better?", October 1), Luciano Sobral spoke with The Brazilian Report's Gustavo Ribeiro. Sobral is chief economist at Neo Investimentos and a former senior economist at Santander. He graded Lula's economy "a B- or something like that." Growth has averaged 3% a year and unemployment has fallen to about 5.3%. But the cost has been huge:

  • "Brazilians are paying 10% real interest rates in the interbank market." A real interest rate is the rate after subtracting inflation.
  • Gross public debt is above 82% of GDP and household defaults are rising.
  • The central bank sees a 90% chance that inflation breaks above its 4.5% ceiling this year.
  • "There's no way an economy that grows 2-3% real can afford to keep paying 8-9% real rates."

That high rate is exactly why the real has been a favorite carry trade. A carry trade means borrowing in a low-interest currency to hold a high-interest one. Sobral was blunt that the election decides which way it breaks. "It is a binary election... Markets have a clear favorite." If Flávio wins, he pointed to Colombia, where after a right-wing win "the markets rallied furiously for 3 months... the exchange rate strengthened by 20%. The local equity index went up by 20%." He expects a honeymoon of "100 days or maybe even more." If Lula wins, the initial reaction would be the reverse: "just go crazy and buy as many dollars as you can." After that he is less sure. Lula "has always been a pragmatic," and Sobral has "a really hard time in believing that Lula will break up with this semi-orthodox model."

Why it matters: last issue, the worry was that high-yielding Latin American currencies were all being sold together. Brazil just showed that one country's politics can break it out of that group. Until October 25, the real is less a carry trade than a bet on who wins.

J.P. Morgan: the carry trade isn't crowded. Change how you fund it

The most useful currency strategy episode of the week was J.P. Morgan's At Any Rate ("Global FX: Spilled OATs, Payrolls, Risks to carry", October 2). Meera Chandan, co-head of FX strategy, hosted senior FX strategists Patrick Locke and James Mulligan. This is a bank's research desk, not outside commentary.

On the jobs report, Locke called it "a pretty soft print." Hiring missed, there was a "pretty decent negative revision, 60K," and the unemployment rate rose after "a 7-month downtrend." He thinks the most overlooked detail was wages: "wage pressure continues to be very soft." Even so, he "wasn't expecting much of a dollar dump," because the US is "still tracking... mid-3% GDP." His call: "consolidation for the USD more so than a sell-off." Chandan agreed that the dollar's supports "haven't really gone away." The dollar "does maintain its yield supremacy overall." In a bond sell-off, "there aren't that many risk-off hedges... and the dollar gives you that at actually decent carry."

On whether carry is about to blow up, Chandan's case was straightforward. Global growth is fine and inflation is sticky, so "rates are higher for longer, which means that carry is just a lot more attractive." She also argued that a soft jobs report "under normal circumstances I think would be a green light for consolidation in the Fed terminal rate and hence... for carry to take off." The terminal rate is the peak level the Fed's rate is expected to reach. "It's really hard not to be pro-cyclical here," she said.

Locke backed that up with positioning data, meaning how much money is already betting each way:

  • Yen: "basically returned pretty meaningfully long," so there is little risk of a rush out of yen-funded trades.
  • Swiss franc: "the pocket of shorts outstanding." Some of that "got cleansed" in the week's sell-off, and options data showed "very large multi-sigma put demand in Euro Swiss." But the "depth and the saturation of the Swiss short is a lot lower now."
  • Australian dollar: "fairly neutral."
  • Bottom line: "not like a lot of reason to think that the carry trade can really get really blown up just because of positioning."

What changed in their thinking was the funding leg. EUR/CHF fell less than 1.5% in a day, but Chandan called that "a pretty punchy 5-sigma move" given how calm the pair usually is. Her conclusion: "it's just going to be very hard for investors to hold on to Swiss... shorts in any meaningful way." The ECB "could be constrained" by French bond stress, so "it's better almost to use euro as a funder."

Why it matters: one of the biggest FX research teams is telling clients the carry trade is wobbling but not broken. That matters for emerging markets because Mexico, Colombia and Brazil are on the receiving end of exactly these trades.

MUFG: the bond sell-off is now spilling into emerging-market currencies

MUFG's team saw the same week through a more worried lens. On The MUFG Global Markets Podcast ("Are spillovers for the FX market from the global bond market sell-off getting bigger?", October 2), the currency team described three ways the global bond rout is hitting currencies:

  1. The dollar: it rose "to fresh year-to-date highs" even as the market pared back October hike bets. MUFG still expects the Fed "will keep rates on hold in October, but then look to hike again in December."
  2. Emerging-market volatility: "volatility has picked up more sharply than for G10 currencies," and "that has triggered an unwind of some of the kind of popular carry trades in the emerging market space. The Mexican peso has kind of stood out." They described "a forced liquidation of those elevated peso positions, which has reinforced the sell off for the peso."
  3. The euro: French 10-year borrowing costs are near 5% and their spread over German bonds is "almost 160 basis points," close to 2011 crisis peaks. Lagarde has signaled higher long-term yields will mean less need for ECB hikes, so "it's not surprising that we've seen the euro falling to fresh year-to-date lows."

Currency analyst Abdul Ahad Lockhart added options-market evidence. Since mid-September, short-dated euro options (under a week) have fallen from about 45% of volume to 20%. One- to three-month contracts have risen to roughly 60%. Net put demand, meaning bets on a falling euro, is more than one standard deviation above normal. In plain English, investors are no longer just hedging a bad week. They are "building medium term directional exposure" against the euro ahead of France's April 2027 presidential election.

Why it matters: J.P. Morgan and MUFG agree on the facts: the dollar is firm, the euro is weak, and the peso was hit. They disagree on whether more selling is coming. That is this week's debate.

Mexico: the "superpeso is no longer super"

On MexMoves (October 1), a weekly show on Mexican business, hosts Damian and Eduardo gave a local view of the peso's slide. "If you were Rip Van Winkle and you went to sleep in September, peso went all the way back to where it was at the beginning of the year. So it's now over 18 to the dollar, started September below 17 at about 16.85." That is about a 6-7% fall in one month.

Their explanation follows MUFG's. US rates went up. Banxico held at 6.5%, so the US-Mexico interest gap "narrowed by 25 basis points." Then Japan "lifted its rates to 125," which unwound the classic trade where investors "fund themselves in yen, and then buy the Mexican peso." On top of that, "a lot of people had been owning pesos for a long time and were cashing out on their profits."

The interesting part is that they aren't worried. Eduardo said, "it's good for the Mexican economy to have a slightly weaker peso." Mexicans no longer rush to raise prices when the peso falls, unlike in 1982 or 1994. That "gives an element of tranquility for the central bank," which "could continue with keeping the rates at the level that they are, or even probably bring them down a little bit more."

There is a catch. Mexico has scrapped its fuel excise tax and since September has been subsidizing gasoline and diesel to hold the price at 27 pesos a liter. That leaves Mexican pump prices "about 15% below US prices." It also helps explain why Mexican inflation is below US inflation. But "it's costing them billions of dollars right now," which is "going to be a problem going into next year."

Why it matters: if Banxico is willing to cut while the Fed is still hiking, Mexico's interest-rate advantage keeps shrinking. That is the opposite of what peso bulls need. The fuel subsidy is the fiscal risk to watch.

The diesel ban threat has eased, which helps Mexico and Chile

Last issue, the possibility of a US diesel export ban was a direct threat to Mexico, which imports a large share of its diesel from the US. This week it eased.

On NAB Morning Call ("US jobs soft, but yields are still rising", October 5), NAB's Taylor Nugent said the G7 agreed to release 100 million barrels of reserves over several months, including "some front loaded releases of diesel reserves." Markets are "taking this as a bit of a signal that that kind of looming threat of U.S. export bans on diesel has moved away." Host Phil Dobbie pointed out the scale: the release is "just a day of global demand," spread over four months. Brent is still around $102.

The country with the most at stake may be Chile. On J.P. Morgan's At Any Rate ("Global Commodities: The final 11%", October 2), metals strategist Greg Scheer said Chile is "almost more than 70% reliant on U.S. imports of diesel to fuel this mining industry and total diesel demand in the country. That is going to have knock on effects if we see a prolonged diesel ban." His colleague Natasha Kaneva noted Middle East oil exports are back to 89% of pre-war levels. Crude is at 98%, but refined products are still at only about 58%. That gap is why diesel, not crude, is the problem.

The dollar breaks out, but Chandler is hunting for the top

Marc Chandler, chief market strategist at Bannockburn Capital Markets, has been watching currencies for decades. On The KE Report ("Marc Chandler - Rates & The US Dollar", October 2) he explained what is driving the dollar.

Since a week before the mid-September Fed meeting, he said, "the dollar index bottomed and has gone basically ballistic. It's up almost, call it 3.6 percent." That is "the best level since April of 2025."

His useful insight is about what actually moves currencies. Textbooks say interest-rate gaps between countries drive exchange rates. Chandler finds that for the euro, yen and sterling, "US interest rates seem to be more important than the differential." He makes one exception: the Canadian dollar, which "has only strengthened twice" in three and a half weeks, "each time... less than 0.1%." There, the US-Canada rate gap at a "20 or 30 year high" is doing the work. Hardy at Saxo made the same point, calling the dollar move "brutal and directionally so."

Chandler isn't chasing it. "Dollars very overbought," he said. He thinks the market is pricing a Fed hiking cycle with "four or five rate hikes" when the Fed itself sees a "mini tightening cycle." His target is a specific level: "about 102.85. That is basically the halfway mark of the sell-off that began last year in January" (from above 110 to a low near 95.50 this January). "As we approach that, the risk reward to be long dollars... changes. So I'm looking for a top. I haven't seen it yet."

By Monday the dollar index had reached "its highest point since early last year... above 102," according to Schwab Market Update (October 6), driven by euro weakness on French debt and Spain's snap election. That puts it less than 1% from Chandler's line.

On why the dollar is strong, Marketplace ("A tale of two deficits", October 5) quoted Joe Gagnon of the Peterson Institute. He gave two reasons: heavy US government borrowing pushes rates up and attracts foreign savers, and "there's just a lot of borrowing to finance data centers in the United States, and foreigners are investing in them." On the same show, Tasty Life's head of futures and forex said he expects the dollar to weaken by spring.

India: a rate hike is coming, but a smaller cycle than the market thinks

Last issue, Jeff Snider described India spending heavily to defend a falling rupee. This week Nomura gave the central bank's next move. On Nomura – The Week Ahead ("Blow Up?", October 2), Sonal Varma, chief economist for Asia ex-Japan, set out her RBI call:

  • The decision: "we do think that the MPC is going to start its hiking cycle. So expecting a 25 basis point hike," with the stance left at neutral. She gives it 70%, a hold 25%, and a bigger 50-point hike 5%.
  • The cycle: markets are pricing "close to 125 basis point in total hikes. We think it's a 50 basis point hiking cycle." The reason is that "super core inflation has dropped from 5%... to 3% now." Super core strips out the most volatile prices, and she sees "no signs of inflation generalization in India."
  • Forecasts: inflation projections revised up from 5% to 5.2% on food, and growth from 6.7% to 7%.
  • Liquidity: inflows from diaspora deposit schemes have "resulted in substantial surplus liquidity in the banking system," so the RBI may announce ways to absorb cash, including "FX swap" operations.

The most important point for the rupee is how the oil shock hits India. Pump prices are government-controlled and haven't risen since May, and probably won't before Diwali in early November. So "the energy price shock basically translates more into a shock for the twin deficits, your current account and fiscal balances... than necessarily showing up in higher CPI." In plain English, the pain shows up in the trade balance and the currency rather than in inflation. That fits a rupee that keeps sliding even as the RBI tightens.

Varma also expects inflation to jump in the Philippines from 6.1% to 7.1%, supporting rate hikes there and in Taiwan. She expects none from Thailand.

Japan: the yen goes nowhere while inflation picks up

There was no big yen move this week. Hardy at Saxo said the dollar-yen rate "is certainly lost in the desert and just chopping back and forth aimlessly." The backdrop is changing, though. On NAB Morning Call, Nugent noted Tokyo inflation jumped from 1.9% to 2.7%, "one more piece of evidence to suggest that the BOJ does have a bit more work to do." Markets price about 3 basis points for an October BoJ hike but "a bit more than 20 basis points" by December. Governor Ueda speaks this week.

The debate

The bull case: carry still pays, and the dollar's run is nearly done.

  • J.P. Morgan's Chandan: "it's really hard not to be pro-cyclical here." Growth is solid, interest rates are high, and positioning isn't stretched. Locke said a soft jobs report "kind of caps the Fed terminal rate at a high level, maybe allows the market to engage in carry... a little bit more."
  • Brazil shows that the right political catalyst can pull a high-yielder out of the pack. Bremmer: "this rally has legs."
  • Chandler thinks the dollar is close to a top near 102.85 because the market is over-pricing Fed hikes.
  • From the retail side, on InvestTalk ("Emerging Markets Under Pressure", October 6), KPP Financial's Justin Klein noted the EEM emerging-market fund is "still an uptrend, despite the strength in the dollar." He argues that if high diesel prices eventually force a 2027 recession and the Fed reverses, "these emerging markets would probably rally dramatically."

The bear case: volatility is the trigger, and it's rising.

  • MUFG says emerging-market volatility has risen faster than rich-world volatility, and that has already forced the peso trade out.
  • Mexico's interest-rate cushion keeps shrinking. MexMoves' hosts think Banxico could even cut.
  • The dollar is still rising on soft data. Michael Howell of CrossBorder Capital, on The Wolf Of All Streets (October 5), described "this progressive tightening through the collateral markets, through the rising US dollar." In plain English, a stronger dollar makes it harder to borrow everywhere.
  • Energy importers keep losing. Klein (a pundit, not a desk) said India, Turkey and the Philippines "all import the vast majority of their energy. So the trade deficit explodes."
  • Brazil's rally rests on one runoff. Sobral's alternative is a dash into dollars if Lula wins.

The trades in play

Rotate the funding, not the exposure. J.P. Morgan's clearest advice is to keep pro-cyclical longs and change what you borrow in. Its preferred longs are "Aussie and NOKI" (the Australian dollar and Norwegian krone). Fund in euros rather than Swiss francs. As hedges against more European spread stress, Chandan likes "a bit of Euro-Swiss, bit of Euro-Yen," meaning bets that the euro falls against both. Mulligan puts fair value for EUR/NOK at 10.70 and sees "some tactical NOK strength." He also likes sterling against the euro, citing a Brexit risk premium of "around 7 to 12%" that the market could start to chip away. The view is bullish if growth holds and European spreads calm. It fails if Swiss franc strength turns into a broad carry unwind. Next data point: US CPI the week after next.

Brazil is now an event trade. Sobral's framework is the clearest: a Flávio win means a Colombia-style rally (about 20% in the currency and stocks over roughly three months). A Lula win means a knee-jerk rush into dollars. Bremmer and Citi's historical rule favor the first outcome, while Reuters' pre-vote runoff polling showed a statistical tie. Next data point: runoff polling into October 25.

A level for dollar bears. Chandler's 102.85 on the dollar index is where he would start looking to fade the move. He wants "some kind of reversal pattern" first.

Copper and gold as commodity read-throughs. J.P. Morgan's Scheer still sees China's year-end demand pushing copper "towards 15K and even potentially overshoot." He thinks official buyers "hold the floor at four thousand dollars" for gold, with a move "up towards five thousand by the time we get to the end of 2027." That helps copper currencies like the Chilean and Peruvian peso if the diesel risk stays contained.

Read-throughs

  • Brazil (EWZ, BRL): EWZ is at its highest since February 2020 and the real had its best day since 2022. Both now depend on the October 25 runoff.
  • Mexico (EWW, MXN): the peso is back above 18 per dollar. Banxico held at 6.5% and may lean dovish. The eased diesel-ban threat removes one tail risk, but the fuel subsidy is a growing fiscal cost.
  • India (INDA, INR): a likely 25-point RBI hike this week. The oil shock hits the current account more than inflation, which keeps pressure on the rupee.
  • Euro and Central Europe: the euro hit about $1.1161 on Monday, its lowest since May 2025. Eurozone inflation rose to 3.8% in September. Nomura's Josie Anderson still expects ECB hikes in December and March. MUFG thinks tighter financial conditions mean fewer ECB hikes than priced. The French-German spread touched 159 basis points intraday Friday before easing to about 137 (NAB). For Poland, Hungary and the Czech Republic, the link is a weaker euro and an ECB boxed in by French spreads.
  • Australian dollar (China proxy): stuck at 69.7 US cents. NAB's Dobbie: "It doesn't want to get over 70, does it?"
  • Oil: Brent is around $102. Middle East exports are back near 89% of pre-war levels, but refined products are still constrained.
  • Broad dollar regime: the dollar index is above 102 and the 10-year Treasury yield is at 5.34% (NAB). October Fed hike pricing has fallen to about 6 basis points, from about 18 at the end of the prior week. A December hike remains the base case at MUFG, Nomura and Bannockburn.

What changed

  • Carry: from "cracking" to "contained." Last issue, State Street confirmed the peso and Colombian peso unwind. This week J.P. Morgan's positioning work says the damage hasn't spread. Yen positioning is already long and Swiss shorts have shrunk, so the risk is narrower than it looked.
  • Brazil went from a non-story to the main story. The first round produced the week's biggest emerging-market move.
  • The diesel ban risk faded. Last week it threatened Mexico's fuel supply. This week the G7 release is being read as heading it off.
  • The dollar kept rising despite the soft jobs report. The dollar index moved from above 101 to above 102, even as October Fed hike pricing collapsed.
  • India moved from defending the rupee to raising rates. Last week's story was intervention and inflows. This week Nomura expects the RBI's first hike.