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some ideas on BRL

After a big stress this year BRL seems to be trying to recover some ground recently. If it wasn't always hard to deal with EM currencies, a very important election turns things to a nightmare.  Will try here to break through some of the noise to find some sense of the recent market.

As the candidates are finally showing up in the media recently, market seems to be realizing that there is no chaotic scenario even with a less liked candidate. To make things even better, a perfect candidate in the market's view is showing some life now. That might be too early but some risks must be discounted in the price after all...

technically USDBRL is trying to break some important levels now.



comparing with a EM basket since last year is possible to see that a lot of bad news have been priced...




specially if compared to a more fundamental long term view...



also looking through a model based on PPP, country risk and commodities...



I ran a simple simulation with the same model to figure where the country risk would be at these USDBRL levels and came up with something around 4 times the actual country risk. With the same average risk of 2002 election year we would have USDBRL around 4.00. And that was a very scary moment. What makes me think there is already too much risk priced.



However (as always), besides the internal risks is also important to watch the behavior of the global Dollar (dollar against other majors and broad) as I notices in the last post, making bets on the BRL favorably against other EM currencies to avoid that risk, if its the case.




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