A weaker BRL and the need to tolerate higher inflation

A worsening in the sovereign's external outlook should imply a weaker currency and a higher tolerance for heightened inflation in an environment in which Brazil's growth picture looks uncertain. 

As of now, FX and local rates risk premia look low relative to the widening in 5y CDS, as the BRL is still far from cheap based on different metrics, our BEER model suggests that the currency is practically fair value. 

"Furthermore, the flatness on the belly of the curve can be explained only by a central bank that is way ahead the curve. Under the possible scenarios regarding Brazil's rating, in all of them still value is seen being long USD vs BRL, but waiting is good for better entry levels, as positioning seems stretched", says Barclays.