The Brazilian real has become a true outlier since hostilities in the Middle East began, becoming the best-performing currency in emerging markets, besides the Hungarian forint.

Nonetheless, even with its recent rise, analysts believe that the real rally still has legs and that a so-called perfect storm to prop up the currency’s value is brewing.

Robin Brooks, Senior Fellow at The Brookings Institution and former Chief FX Strategist at Goldman Sachs, predicts that the real “has a lot further to go,” and will overcome the 4.5 real per dollar exchange rate, which he considers the currency’s “fair value” exchange rate

Brooks states that the Brazilian real is “horribly beaten down and undervalued” and is poised to benefit from geopolitical drivers similar to those experienced when Russia invaded Ukraine. At the time, the Brent oil benchmark scaled 40%, and the Brazilian real rose 20% too.

For him, two main elements will propel the Brazilian real higher. The first is the U.S.’s willingness to end the current war in Iran as soon as possible, which will lift carry currencies such as the Brazilian real.

The second driver of this predicted rise will be the uncertainty around the navigability of the Strait of Hormuz in Iran. This benefits Brazil, a commodity and oil exporter, in turn propping up the real’s value.

“In 2022, we never quite made it below my fair value of 4.50, but I think that’s now in play. I expect the coming months to see $/BRL finally go below 4.50,” Brooks concluded.

Nonetheless, other uncertainties that can affect the Brazilian real’s recovery remain, including the upcoming elections, which have become a toss-up between President Luiz Inácio Lula da Silva and Flávio Bolsonaro, son of former President Jair Bolsonaro.

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