Israel-Iran escalation hits Brazil's currency, stocks, and inflation expectations hard

The renewed attacks between Israel and Iran hit Brazilian trading desks with full force on Monday, transforming what was already a tense economic environment into something closer to a minefield — and imposing on Brazil a cost that goes well beyond the exchange rate.

The dollar brushed against R$5.19 during the session, the Ibovespa traded lower, and futures rates posted yet another morning of intense volatility, with the market trying to price in not only the conflict itself but its ramifications for energy, inflation, and monetary policy. The collapse of the ceasefire, in place since April 7, came precisely as Brazil was racking up eight consecutive weeks of stock market declines — the longest streak since the Real Plan — and foreign investors had already pulled R$474.9 million out of B3 equities in a single session last week. The median Focus survey projection for 2026 IPCA rose from 5.09% to 5.11%, and economists polled by Folha de S.Paulo simultaneously raised their Selic rate estimates, signaling that the Central Bank will have less room to maneuver than markets had assumed only weeks ago.

The aviation sector is where the geopolitical shock translates most directly into operating losses. Azul cut 5% of its total capacity after the spike in jet fuel prices, according to CEO John Rodgerson, with cuts spanning domestic, regional, and international routes. Latam expects a three-percentage-point reduction in third-quarter capacity versus plan. IATA projects that Brazil's domestic passenger flow will fall below 90 million this year. At Embraer, CEO Francisco Gomes Neto told Reuters that airlines are deferring decisions on exercising aircraft purchase options amid the uncertainty — a worrying sign for a company that had just surpassed 500 orders for its E2 line. To help cushion the blow to airlines, the Lula administration is preparing a provisional measure earmarking R$1 billion in working capital for scheduled air service providers. Vice President Geraldo Alckmin, for his part, made the case for Brazil as a natural candidate to lead sustainable aviation fuel production — a promising horizon that the current crisis, paradoxically, makes more urgent.

Agribusiness, the traditional pillar of Brazilian economic resilience, faces an unprecedented convergence of pressures. The war-driven rise in fertilizer prices is eroding the competitive advantage that cheap, abundant land has historically given Brazilian producers over their American counterparts — at a moment when China had been redirecting grain purchases toward Brazil to escape Trump's tariffs. Now, Citi analysts warn that the 2026/2027 crop will be planted amid uncertain weather, high leverage, and still-compressed margins. The World Meteorological Organization indicates an 80% probability of El Niño between June and August, with a 90% chance the phenomenon persists through November, adding an unpredictable climate variable on top of a harvest already projected at 358 million tons — a historic record — but with declining profitability. UBS BB, in a report released Monday, revised its commodities strategy, now favoring oil and steel over iron ore, whose price fell 0.78% on the Dalian exchange.

On the trade front, the Brazilian government is navigating three simultaneous fronts of attrition. The European Union confirmed its ban on Brazilian beef, poultry, and other animal-origin products beginning in September, and Brasília is oscillating between diplomacy and threats of reciprocity — the Ministry of Agriculture's Secretary for International Relations, Luis Rua, stated that Brazil "does not rule out retaliating" if it is not treated as a partner. With the U.S., the situation is equally delicate: American investment in Brazilian companies fell 29% in 2025, and the Lula administration acknowledges it has "less room to negotiate" the second U.S. tariff, of 12.5%, proposed on forced labor grounds.

Domestically, Raízen's restructuring monopolized corporate attention. The sugar and ethanol producer controlled by Cosan and Shell confirmed that 75% of creditors have signed on to the largest out-of-court reorganization in Brazilian corporate history, involving R$66 billion in debt. The agreement provides for converting 45% of the debt into equity, a R$3.5 billion injection from Shell and R$500 million from the family office of founder Rubens Ometto, plus the sale of Argentine assets for US$1.4 billion to Swiss trading firm Mercuria Energy — a deal that will put between US$900 million and US$1 billion into the company's coffers. In parallel, a Federal Court granted an injunction suspending the Lula government's R$515 billion energy mega-auction involving Âmbar, Eneva, and Petrobras, following an action by the Federation of Industries of Ceará — a decision that compounds the Public Prosecutor's revised position before the TCU on the same auction.

In the week ahead, the market will have to digest the evolution of the Middle East conflict and its capacity to push oil and global rates even higher, while tracking Raízen's out-of-court reorganization through the courts and monitoring any signal from the Central Bank on the Selic trajectory. The battery auctions scheduled for December, the negotiation with the European Union over meat, and the progress of tax reform — already prompting companies to move toward the Manaus Free Trade Zone — round out a dense domestic agenda, in a country trying to grow at full installed capacity but watching every external shock narrow its margin for error a little further.