Most people think the Brazilian Real is cheap and will suddenly go back down to 4-1 with USDBRL. What most people don't take into account are the 4 most important factors when it comes to a currency: Inflation, Interest Rates, Economic Health, Political Risk.
Inflation is the first aspect to look at. Typically a currency will stay in a range whilst inflation continues to increase asset prices and eventually teh currency breaks out of the range to establish a new range. At the moment of the breakout, everyone thinks it is temporary and will go back down, when in reality it is just the currency finally catching up to a fairer range inline with inflation over the period. This repeats itself over and over again.
If you add a reducing interest rate, weak economic health and political risks you can expect the currency to depreciate further than the longer-term inflation average as foreign investors do not want to own a risky currency that offers low-interest rates.
So is the BRL cheap? We dont think so! We think it is actually at its fair value and until interest rate increases to make the country risk worth the currency risk! The Finance Minister Guedes has openly admitted that he does not have intentions to intervene heavily in the exchange rate and Brazil will see a higher demand for exports with a weaker Real which they need if they are to keep the economy going. A rate of 5.5 is probably going to be around for a while
nice job, not specialized in forex but will be looking for more of your insights! great prediction
juhanipur
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The current inflation is 2.13% per year. The real estate local prices have remained flat for the last 6 years and the prices a cut in half if paying in USD. I believe the political risks are the main reason for weak Real.
EmpireConsulting
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@juhanipur, Yes that is true current inflation is low but I doubt it will stay low for long. Real estate prices are rising fast due to low interest rates accelerating debt and making rental yeild more attractive. The problem most people have is they look very short term and not at the longer-term trends. Thanks for your post and opinion