BRL: Real Rates Diff vs External Acc vs Valuation

BRL cheap or expensive?

Below a little histogram of distribution of 2y nominal rates vs YoY realized headline CPI in Brazil x US.
It is basically at an all time low. It’s has never been cheaper to sell BRL x USD in terms of real carry differentials (consequently versus many currencies out there).

Below is a [CurrAcc + FDI / GDP] chart… funding internal spending has been alright:

Take into consideration that pass-through effects haven’t yet been fully visible in external accounts. USDBRL has moved nearly 40% higher in 2 years and its 200-dma is up +19% YoY.

Real Effective Exchange Rate.. metrics by Citi and JPM… historically cheap in terms of valuation:

But considering where real carry was back when valuations were at around same levels (2002)… the game is entirely different now.

Maybe playing volatility is a better game?

Buying 1×2 USDBRL put spreads if one is interested in BRL longs? As volatility has been historically correlated to overall direction of the USDBRL trade and outright vol is very expensive right now.
Want to sell BRL, benefit from high vol? One can sell ATM puts and buy OTM call spreads to benefit from high vol levels.

Short-term implied vols at high-end of historical levels… > 92%-ile!

BRL still one of the worst ways to play a “Brazil long” story, but good to trade around as vol is high.

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