USD/BRL likely to trade around 4.5 in 2016

The commodity bull run ends, lacklustre global growth and China's economic slow down all of these bode poorly for Brazilian real. Much domestic woes have weighed with BRL selling off as the country's risk premia rises.

The rise in risk premia also reflect questions on the impact of external environment in Brazil as well as domestic and political stress. 

"Although we view BRL as the fourth most attractive carry currency globally, it has become less attractive and this itself has weighed on BRL. We still view USD/BRL as cheap below  4 and expect the pair to trade at the 4.50 handle next year", says Rabo bank in a research note.

Indeed, the high interest rate in Brazil (SELIC at 14.25%) is one of the few supporting factors for BRL and this leaves it susceptible to overshoots on the downside when volatility rises.