BRL and other brazilian assets have run quite a wild path last 4 years. From the “country of the future” to most hated EM and now to some “OK back to business”. No intention to tell the whole story again now once most know it very well. What calls my attention now is that perhaps once the excesses of the downside relative to other currencies has worked out it seems now for me that the optimism has also run its course in relative value to other EM's. Important to notice the “relative” because I still believe commodities has a way to go up so BRL will still benefit from it but Im concerned the “very cheap” is behind, both in relative value and also in fundamental terms.
Currency is probably one of the worst markets to predict. Besides many factors acting at the the same time they also change in importance during the time. Not to say that sometimes it seems no fundamental factor works at all. But sure tones of models can be made and at least we are not in the middle of nowhere without a compass.
Built this simple one below using only commodities and CDS. Chart is YoY %
Not only not cheap but also a bit expensive.
On relative value against an equal weighted EM basket it also doesn't look very cheap anymore.