Brazil currency outlook stable on the eve of first-round presidential vote

By Gabriel Burin

BUENOS AIRES, Oct 2 (Reuters) - Brazil's real currency outlook was stable on the eve of Sunday's first-round presidential election, according to a Reuters poll of FX strategists, though the result may trigger some short-term moves.

The real is expected to trade at or near to 5.20 per U.S. dollar in coming months as investors weigh risks around the country's budget prospects and the waning appeal of the carry trade.

Brazil's real is up 4.8% for the year after a relatively calm election-year performance contrasting more tense campaign periods for local assets in the past as well as in other Latin American countries.

In one year, the real is forecast to change hands at 5.23 per dollar, roughly where it was trading on Thursday, according to the median estimate of 36 currency strategists polled September 29-October 1.

The 12-month view was also unchanged from a forecast of 5.23 last month, even as Brazil's main candidates have stopped short of presenting convincing plans to fix a worsening fiscal picture.

President Luiz Inacio Lula da Silva's team has proposed a gradual consolidation palatable for lawmakers in Brasilia but the program lacks significant expenditure cuts, analysts said.

Conversely, his main opponent Senator Flavio Bolsonaro is considering an aggressive adjustment likely to face difficult political hurdles.

"In the hypothetical scenario where Lula takes office (for a second straight term), the market's primary concern would be the trajectory of public debt," said Marcio Riauba, FX Trading Desk Manager, StoneX Banco de Cambio.

"In the event of a victory for Flavio, we might see roadblocks or difficulties in passing certain reforms or fiscal adjustments through Congress."

Da Silva has a small advantage over Bolsonaro for the October 4 round in election polls. They will face each other again in a runoff on October 25 should neither win more than 50% of valid votes in the first round.

The real could fall to 5.31 the day after Sunday's election, a 1.5% loss, if Da Silva finishes ahead of Bolsonaro, according to the consensus view of 10 respondents who answered an extra question.

The currency may strengthen to 5.00, or 4.6%, in the immediate aftermath of the vote if Bolsonaro wins the first round.

However, the real is expected to trade at 5.19 at the end of this month following the runoff, returning to its current levels as attention shifts back to the structural drivers after the election.

Besides the fiscal front, another factor in 2027 will be the expected reduction of a still large spread between Brazilian and developed market interest rates attracting flows to profit from so-called "carry trades".

"If Lula wins in the first round by a wider margin than polls indicate, the real should move to 5.30 or 5.40," said Rafael Prado, an economist at GO Associados.

"If Flavio comes in first, the expectation is for an appreciation to between 4.90 and 5.00. But looking 12 months ahead, it’s a different story, we’ll see a trend independent of the election: Brazil's interest rate differential."

"It will very likely fall further starting next year, as the Central Bank of Brazil lowers interest rates and the U.S. Federal Reserve raises them," Prado added.

(Other stories from the October Reuters foreign exchange poll)