1. FX Outlook
  2. FX Options Weekly

Macro and Vol Commentary

The real performance held up well in recent weeks despite the dollar strength and has benefitted from its recent weakness as it tested the 5.10 level. With the presidential elections approaching next month, what is the currency outlook trajectory in the near term?

Brazil election

  • Luiz Inacio Lula da Silva, who was the president of Brazil from 2003 to 2010, and current president Bolsonaro are set to face each other in the first week of October.
    • A candidate has to receive more than half of the valid votes to win. If this does not happen in the first round of voting on October 2nd, a runoff vote will take place on October 30th between two front-runners.
  • Bolsonaro was elected in 2018, and while he introduced a much-awaited pension reform in 2019, most of his agenda was derailed by the covid pandemic.
    • During the period, the president was heavily criticised for his approach toward vaccinations and lockdown measures in place, putting the nation’s healthcare sector under threat.
    • His controversial stance on the pandemic alongside environmental protection helped to erode his popularity, with the approval polls falling from 36% at the start of his term to 23% over the course of 2020.
  • Now, he is banking on the recently-implemented subsidy and fiscal support measures in the last couple of months to benefit his presidential campaign.
    • Relief money, including cash subsidies for poor households, began flowing in recent weeks to help households struggling with rising inflation pressures.
    • Likewise, tax cut on fuels and utilities drove the biggest consumer price drop on record in July and in August
      • In his most recent pledge, he said he would privatise the state-oil company Petroleo Brasileiro; cut corporate tax; pass pro-gun laws and make abortions harder to get.
      • He also pledged to keep it elevated at 600 reais per family into next year instead of letting it expire in December.
  • Meanwhile, former President Lula, who is currently leading the major opinion polls, is yet to provide concrete plans given his win.
    • Lula’s team is facing one of its biggest obstacles as it aims to boost voter intentions in the middle class, which represents about 25% of the total population, whose participation has continued to decline.
      • At the moment, Bolsonaro holds more backing in this category.
      • Instead, Lula is targeting the poorer proportion of the population and has pledged to simplify the tax system so that the rich pay more and the poor – pay less.
    • Lula has also said he would change the rules that limit public spending; reform the tax system; ensure energy self-sufficiency and protect the amazon rainforest, although no concrete measures were announced.
  • In the run-up to the general elections, Bolsonaro seems not far behind and has seen his popularity improve in the last couple of months.
    • According to the DataFolha survey, Lula would win 45% of the first-round vote, with Bolsonaro at 37%
      • Lula’s number is, however, lower than two weeks ago, when it was 47% following the first televised presidential debate.
    • This highlights the narrowing popularity between the two candidates weeks before the elections.
    • This gap should further narrow as cash continues to be distributed to poor households following Bolsonaro’s reform, boosting his approval rating.
    • However, given Lula’s win, we anticipate a positive reaction from the markets as polls currently estimate he is in the lead, aligning with market expectations.
  • The further threat could come in the post-election event, in which the opposition could reject the outcome of polling results and create turmoil in a power struggle.
    • Bolsonaro claimed, ‘only God can take me from Presidency’ and while he has rejected any desire for a coup, any opposition from his side could exacerbate Brazilians’ mistrust of government institutions and add bounds of new volatility to Brazilian markets.
    • The close call between the two front-runners is likely to introduce bounds of volatility to the currency pair, given the election results.
    • Because of the small margin of difference, we anticipate the markets will find it challenging to price the Brazilian assets and are likely to pull back some of their appetite in the meantime.
  • However, as the country gears up for elections in October, economic performance is dominating the national debate.
    • A lack of majority votes in the first round will be beneficial for Bolsonaro as it will give more time for his aid to be distributed between households in the month.
    • Likewise, inflation is showing signs of easing and, if it continues to decline, should also benefit Bolsonaro’s administration.
  • At the same time, additional social spending is elevating inflation expectations above the target rate through 2024.
    • The central bank estimates inflation to increase by 5.38% in 2023 and 3.41% in 2024.
    • More emphasis will be placed on 2024 figures as recent tax cuts, and fiscal stimulus has likely dampened the inflation figure in the near term.

Candidates Pledges (2)

Bolsonaro’s election hinges on the already-introduced aid as well as promises of further cash handouts. And that impact will be most likely felt in the days approaching the general election, as more and more of the aid gets distributed between households. Indeed, his approval has been slowly improving to reach 30%, up from 23% at the start of the year. Lula, who is currently leading the polls over by 10 margin points, can not afford to make mistakes in his campaigns to keep the margin on his side. In the event of the losing opposition rejecting the outcome, that could be bearish for the real in the immediate term.

(Sources: Banco Central do Brasil, Bloomberg, Sucden Financial)

Volatility Commentary

BRL outlook looks uncertain, as the incoming elections, USD strength and inflationary pressure are likely to play up and fuel some volatility in the next month. In the options space, volatility tended to realise below implied over the summer on the 1-month horizon despite the current macro landscape, averaging at – 4 %. With this in mind, we expect this trend to revert and favour buying volatility over the 1-month horizon by going long ATM Straddle over the next 3 weeks, over the election timeframe.

USDBRL 1-month Implied and Realised Volatility

Implied Vs Realised (3)

USDBRL Trade Idea

  • 03/10/2022 Expiry

  • Buy USDBRL Straddle, 5.1900 Strike, in USD 1mio – Pay USD 44K Circa

Positioning Charts

USDBRL NDO Positioning Data 01/09/2022 - 07/09/2022

The volumes for the week to September 14th has been low but there remains a preference for downside puts. The range is similar to the previous week but volumes were significantly down and so were the notional values. The range shows puts at 4.90 but calls are also more narrow at 5.40. There is little upside cover at the time of writing, and with the inflation reading in addition to the election we could see a large move in the coming weeks. 

Usd Brl 1 7

USDBRL NDO Positioning Data 07/09/2022 - 14/09/2022

Usd Brl 7 14 (1)

USDCNY Vanilla Positioning Data 01/09/2022 - 07/09/2022

Volumes were lower than the previous week, there are more upside calls bought with an expiry in the near term. There is cover to 7.10, the notional values are marginally higher so the market expect the trend to continue in spot. Puts traded also have a lower notional value and have a lower range than the month prior. This week there was more of a concentration of trades around spot with near dated expiries. 

Usd Cny 1 7

USDCNY Vanilla Positioning Data 07/09/2022 - 14/09/2022

Usd Cny 7 14 (1)

Charts and Tables

FX Expiries

Expiry (25)

Volatility Grid

Grid (50)

Historical Spot FX Volatility (30D Rolling)

Chart (16)

FX Matrix (today)

Spot (74)

Weekly Change

Week (56)

Key Events & Releases

Calendar (87)

Technical Analysis

JP Morgan Global FX Volatility 


The index has improved in the recent sessions and has breached the DMA resistance levels once again to settle at 11.28. The stochastics are falling, with %K/%D converging and now declining out of the overbought, a strong sell signal,. Likewise, the MACD diff is positive and converging, suggesting we could see a push lower in the near term. The index needs to break below the 50 and 100 MA levels at 11.22 and 11.14, respectively, before it can target the 200 MA. On the upside, the break above 11.40 could pave the way for 11.65 resistance. The resistance at 11.40 is seen to firm, and the indicators suggest that we could see the index weaken. If this materialises, then we could see a head and shoulders formation, which would solidify the outlook for lower prices in the near term.

Dollar Index 


The index has strengthened in the last couple of sessions and broke above key resistance at 109.00 but has struggled to break above the 110 level. The stochastics are seen converging on the downside near the overbought, and the MACD diff is positive and converging, but that momentum has stalled and flattened out today. In order to confirm the outlook of lower prices, the index needs to reaffirm resistance at 110 and then take out the key support at 50 MA at 109.44 before 100 MA at 109.23. On the upside, a break back above 110 and a test of 110.78, the recent highs, would indicate further upside potential. The indicators suggest that there is interest for downside momentum, but it has waned in the last couple of days. With the 50 MA support level holding firm, we expect the dollar to remain supported above this level as it trades sideways in the meantime.



The pair has been gaining ground in recent weeks, but resistance at 5.26225 held firm, causing the pair to create the double top formation. The prices have once again been testing this level today and settled at 5.2472. The stochastics continue to diverge on the upside, deep into the overbought, suggesting we could see a change of trend in the near term. Meanwhile, the MACD diff continues to diverge on the upside. To suggest the change of momentum, the pair has to break back below the 200 MA support at 5.2279 before the 50 and 100 MA at 5.15. This would indicate further downside momentum into 5.00, the recent lows. On the upside, the resistance at 5.26 needs to be broken above before the pair can target 5.30 and 5.40, respectively. With the candle bodies getting smaller and the indicators being overbought, we expect the pair to soften in the near term.



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A large number of views are being generated at all times and these may change quickly. Any valuations or underlying assumptions made are solely based upon the author’s market knowledge and experience.

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