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This information is based on playing vanilla 1.09, very hard and furious. It took me maybe 10 tries, before I got some success. Granada is hard. Don't get discouraged.

In all the games I played, Portugal and Castile allied during the first year. Usually (always? not sure) Portugal was the alliance leader.

You want the situation where Aragon (and Navarre also) get into other alliances (usually this is with England). I'd suggest just restarting if either country does join Portugal, though if you want to play it out, more power to you. I'm sure it is possible. But facing one more AI stack o' doom is just too much for me.

Initial Moves

First off, set your religious tolerance as normal, and push your Naval/Land domestic policy one click towards land. You need the cheaper cavalry, and (later on) the manpower bonus.

During the first year, you can't do anything (unless the Christians DoW you), because you have no diplomat. So, lower maintenance and wait. Usually they don't declare war, because they already have a war on with your allies in North Africa.

About September, take a loan and buy cavalry. You should be entering the war with your starting infantry (15) and perhaps 10-12 cavalry. Note that your starting forces are overbuilt, even before the additional cavalry. The maintenance expense of keeping all those troops is very large, but you must have them.

Even though you have no diplomat shown, it appears there's a bug and you can actually DOW on Jan 1. So, do that. Invite your allies - they can get you warscore via naval actions, and even occasionally help out a bit on the ground. (More on this later.) The race is on here: you getting enough warscore to get territory out of the war, as versus you going bankrupt from maintenance expenses.

First Iberian War

My strategy was to beeline for Portugal. So, when you DOW have your troops in Gibraltar. This requires the Castilian uberstack to not be in Andalusia; don't move anywhere until the stack moves off. Then attack through to Algarve and beyond, and hope you get decently lucky. Ideally the Portugeuse will have all their troops elsewhere; you must at least cover Portugal while sieging two or all three provinces. (Be sure to read the article on bouncing; with your initial infantry force you can siege Algarve with 10200 infantry, while 4800 more sit on Tago and Oporto, and your 10000 cavalry bounce back and forth.)

The goal here is to knock Portugal out of the war, so that you only have to deal with Castile. And, of course, to take territory. Algarve is a core for you so it's worth having in spite of being Catholic. Once you've taken all three provinces (which takes quite a while; again you can get unlucky here if the AI happens to coordinate sieges on your two provinces), take Algarve in the peace; but don't go for the peace until the enemy forces the issue. Either country may force your hand by sieging one of Portugal's provinces, or Castile may get very close to capturing both of your provinces, which would allow them to force you to accept a peace offer. If the enemy does do either of those, immediately make peace for Algarve. Not only does this knock out Portugal, it means Castile must take a third province to force peace on you. If Portugal sends you a peace offer containing Algarve and anything, and you are at all in danger of needing to make peace with them, don't dismiss the peace offer -- leave it around for the full 2 months, so that if sieges you're worried about advance, you can accept the offer.

Once Portugal is subdued, ideally you still have enough armies to go after Castile. Note that you're likely to go bankrupt somewhere along here. But after the first burst of combat against Portugal it does not matter that much; you should only be attacking Castile for sure wins (i.e. cavalry against newly built forces on plains at 5:1). Your goal is here is very simple: Andalusia. Ideally you'll still have ~18000 troops, enough to siege three places at once. So, do that. (You may be able to siege as many as five provinces using bouncing.) Make peace as soon as you can for Andalusia. Note that your allies are likely to lose more battles than they win at this point, so make a separate peace if necessary. One other thing worth trying is to siege Castile's capital if they are starting to make siege progress against you; often the AI will leave a siege, even an advanced one, when its capital is threatened.

Round 2

Immediately upon peace, disband infantry down to your new army support limit, whatever it is. Then bide your time waiting for round 2. Round 2 should be somewhat similar to round 1. First you knock out Portugal, relying on cavalry superiority in plains (and possibly taking advantage of defending across river bonus). Then you spread out to siege Castile. This time, though, you've got more territory, and Castile less, so it's much harder for Castile to force peace on you. And, you can often get help from your allies.

Your allies play an important role after the first war, but they first have to defeat the enemy fleets to get land access (via the strait of Gibraltar); as long as the strait is blocked they will do little or nothing to help you in terms of armies. What appears to be happening is lots of sea battles, with pretty arbitrary winners, but your team has more ships and/or is closer, so eventually they win. By the second or third war, they will have taken control enough so that the straits are not blocked. After that, they send over the standard AI stacks of 20-30 or so to help out. AI allies are particularly important in taking out the final Castilian uberstack. Let them do your fighting if at all possible.