Prime Time for the Brazilian Real

Almost all EM currencies are rallying against the Dollar, but Brazil is top of the list

Four years ago, I awoke to news that Russia had invaded Ukraine with a profound sense of horror. At the time, there was massive uncertainty, because it wasn’t clear if Ukraine would be able to withstand the Russian onslaught and the West was still formulating its response.

Amid all this uncertainty, Latin America was one of the few places that stood to benefit. It was far removed from the bloodshed in Europe and - as oil prices rose - its commodity exporters stood to gain. Brazil’s Real was the biggest winner. The $/BRL exchange rate ended 2021 near 6.00, but had moved to almost 4.50 by March 2022, which was at the time (and continues to be) my estimate for its fair value.

That move was all about the terms of trade. Russia’s invasion of Ukraine was lifting commodity prices across the board, benefitting an agricultural and commodity power house like Brazil. The Brazilian Real is once again strengthening now, but the drivers of the current move are fundamentally different. As I forecast in my preview for 2026, emerging market (EM) currencies are strengthening across the board against the US Dollar, so the current move is about a broad debasement of the greenback on fears around Fed independence and institutional decay across the G10.

The chart above shows the trade-weighted Dollar versus the G10 (blue line) and against EM (black line). I’ve been flagging the steady decline in the Dollar versus EM as a leading signal for Dollar direction, while the G10 Dollar is much more erratic and noisy. The EM Dollar made a new post-election low yesterday. The appreciation of the Brazilian Real is part of this.

There’s more to the Brazilian Real story than just this however. The chart above shows the $/BRL exchange rate (blue line) versus my long-standing fair value of 4.50 (black line). As the chart shows, $/BRL rose sharply when COVID hit and never recovered. The Brazilian Real remains deeply discounted relative to where it was before the pandemic and it’s not really clear why. This undervaluation is now once again on markets’ radar screens, which is why the Real is outperforming other EM currencies. The Real is up almost seven percent against the Dollar year-to-date, which makes it the top performing currency in EM.

My $/BRL fair value of 4.50 strikes many as bonkers and - to be fair - we’ve never actually gone below this level since COVID. But it’s important to see Brazil’s Real in the bigger picture. The chart above indexes the Real (blue line) versus the rest of EM (black line). The degree of Real undervaluation is much more profound than my fair value admits, so the undervaluation argument is really quite a strong one. Markets usually disregard valuation as a currency driver, but - every now and again - they pay attention. I think now’s one of those times.

Of course, the commodity and terms of trade argument I made in 2022 still applies now too. The chart above shows the January trade balance in every year from 2000 through 2026. It’s clear that the massive boom in agricultural and oil exports has transformed Brazil into a structural trade surplus country, a shift that’s not happened anywhere else in EM. It’s worth noting that this shift has happened since COVID, i.e. it overlaps with the sharp discounting of the Real since the pandemic. While it’s true that the trade surplus has yet to translate into a materially improved current account, this is just because that shift will take longer to play out. The underlying dynamics in the balance of payments are profoundly favorable, which just strengthens the undervaluation argument. It’s prime time for the Brazilian Real.