1. FX Outlook
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Macro and Vol Commentary

Despite a weaker dollar in recent months, USDBRL's performance remained broadly unchanged, as fiscal fundamentals drove the fluctuations throughout the election period. With Lula now firmly in power, what is the outlook for USDBRL in upcoming months?

Brazilian Economy

  • The Brazilian economy, in line with more developed countries, sees signs of slowing growth based on softening global demand.
    • Manufacturing PMI is now at 44.2, acts as a drag on composite performance, which is now at 49.1.
  • Growth for 2023 is also set to recede sharply to 0.8%, down from 3.0% in 2022.
  • The one sector that has held up well so far is the consumer segment.
    • Services remain expansionary at 51.0, above the EU and the US which are contractionary.
    • While retail sales also continue to soften, with y/y growth at 1.50%, still in line with the 2-year average, suggesting the consumer sector is healthy.
    • Likewise, service sector growth remains robust at 6.3% y/y
  • The inflation story differs from that of the US / Europe, as inflation has already halved from 10%, while developed countries have only begun to soften in the latter part of 2022.
  • Data shows continued weakness m/m, but now the downtrend is slowing down, with each reading overshooting expectations.
    • IPCA inflation came in at 5.79% y/y in December, above expectations, but 0.11% lower than in the previous month.
    • Indeed, inflation in Brazil has been coming down at a slower rate than in the US or Europe.
    • PPI remains negative m/m but has come up from the lows of -3.11% to -0.54% in November, and we expect the PPI to flip back into the positive growth.
      • China's reopening theme could see commodity prices, and in particular, oil, shoot higher, driving the growth in producer price performance.
  • Further inflation risks arise from Petrobas increasing refinery gate gasoline prices by 7.5% to 3.31 reais, marking the first increase since June.
  • Despite softer inflation growth, wages remain upwardly sticky, with real effective earnings continuing to climb to BRL2,794 in November, March 2022
    • This further underscores the availability and propensity of households to spend, supporting retail and other consumer spending habits in Q1 ’23
  • Likewise, the overseas demand remains robust, highlighting the robust underlying fundamentals in Brazil.
    • Export volume index continued to climb, with November figure at 114.80, up from 108.92 in October.

Monetary and Fiscal Support

  • The big risk for this year will be Lula's approach to policy support.
    • Lula's government is increasing the size of welfare programmes beyond strict budget limits to address social issues, breaking the fiscal ceiling by BRL145-176bn
    • However, this new wave of spending could put Brazil's debt on an even more unsustainable path and stir inflation.
    • If the tax on fuel is reinstated, that could support inflation higher for longer.
  • Brazil and Argentina are said to be in discussions for a joined currency. While we expect this to come to fruition in the longer term, the signalling from the two nations could be a sign of increased cooperation between the economies.
  • Central bank meeting is scheduled to take place next week and is expected to remain flat at 13.75%, the highest among the major developing economies.
    • CB has kept the rates unchanged at current levels since August, hiking 11.75% since the end of 2020 and keeping the rate unchanged right through the election process.
    • Brazil has done most of the damage before the Fed and the ECB, driven by historically high inflation.
  • With the threat of lingering inflation and abundant fiscal support, the rates are likely to remain elevated for longer

The prospects of high terminal rates keep real an attractive investment, especially among the EMs. The outlook for the currency remains uncertain. Despite softening inflation growth, the releases overshoot expectations, and the decline slows. We expect inflation to settle at around 5.0% in 2023. That is above the target rate of 3.25% and could mean terminal interest rates will remain higher for longer. The implementation of Lula's policies is all set to prolong the country's inflation but also increase uncertainty in the economic outlook. In the meantime, we expect tighter monetary policy outlook to be a tailwind for BRL. This, coupled with softer tightening from the Fed and a weaker dollar, is likely to keep USDBRL rangebound around 5.15 in the near term. However, further down the line, the USDBRL is set to strengthen, and we expect the 5.15 support remaining intact.

Sources: S&P Global, IBGE - Instituto Brasileiro de Geografia e Estatística, Banco Central do Brasil

Volatility Commentary

Over the last few months USDBRL vol has generally realised lower than implied, though recently the pair has seen realised vol pick up whilst implied vols have come off. Talks of macro recession are mixed with a market potentially being complacent about the next year. With a uncertainty on the exact path of USD rate hikes, with divergence between Fed dots and market expectation and Brazilian President Lula’s economic policy putting strain on the Brazil’s finances we favour long vol/long gamma positions at this level.

USDBRL 1-month Realised vs Implied Volatility

Realised Vs Implied (10)

USDBRL Trade Idea

  • Non directional trade – Both legs priced as 3mth expiry options with 10m USD notionals each
  • This is a non-directional long vol and gamma trade
  • Buying a strangle in 10m USD a leg (20m total USD notional) at circa 18.2 vols generates 55k Vega
  • Note this trade idea is only appropriate for investors who are able to maintain and delta hedge a gamma position

Positioning Charts

USDBRL NDO Positioning Data 11/01/2023 - 18/01/2023

USDBRL positioning reduced significantly in the week ending January 25th; notional sizes reduced sharply, and the trading range narrowed to 4.80-5.80. There are some big put order expiries taking place this week, ahead of the Central Bank meeting on February 1st, with the biggest contract expiring at around 5.40. After that, calls become more prevalent, and upside cover is reaching 5.70. The markets expect USDBRL to weaken in the last week of January before trend reversal in February. 

Usd Brl 11 18 (2)

USDBRL NDO Positioning Data 18/01/2023 - 25/01/2023

Usd Brl 18 25 (4)

USDCNY Vanilla Positioning Data 11/01/2023 - 18/01/2023

USDCNY range shifted higher to 6.70-7.00 in the week ending January 25th, and the number of puts diminished strongly. Some upside cover 6.90-7.00 remains, and the overall sentiment suggests marginal upside in February. Still, appetite diminished with fewer option expiries taking place as the market is gone for national holiday celebrations. The smaller market trades have left the market, and this is highlighted by bigger notional expiries seen this week.  This week expiries are set take place around 6.80, before widening in February. 

Usd Cny 11 18 (1)

USDCNY Vanilla Positioning Data 18/01/2023 - 25/01/2023

Usd Cny 18 25 (2)

Charts and Tables

FX Expiries

Expiry (35)

Volatility Grid

Grid (59)

Historical Spot FX Volatility (30D Rolling)

Chart (28)

FX Matrix (today)

Spot (86)

Weekly Change

Week (67)

Key Events & Releases

Calendar (100)

Technical Charts

JP Morgan Global FX Volatility 


The index continued to remain range-bound, as it remained under the moving averages levels, but momentum on the downside has waned. The index found support at 11.20 and settled slightly higher. The stochastics are continuing to gain pace, and momentum is not showing signs of slowing, which could signal some upside in the near term. The moving average levels at 10.50 are firm, and the index would first need to supersede these levels before testing 11.00. Alternatively, appetite below current levels could set the scene for 10.00 and 9.50 in the longer term. We expect some upside in the near term but find resistance at the moving average levels.

Dollar Index 


The longer-term trend on the downside has continued in recent weeks, with the dollar index edging marginally lower to test support at 101.70 and remaining slightly above this level. The indicators point to an upside shift, with %K/%D converging on the upside near oversold, and the MACD diff is negative and converging. To confirm a change of trend, the index needs to break above resistance of 102 before testing the moving averages at 102.09 and 102.82 for 50 and 100 MA, respectively. Alternatively, if the longer-term downside trend is to persist, we could see levels test 101.20 and then 101.00. The indicators point to a change of trend taking place in the near term, and we expect to see prices test 102. However, the moving averages will cap any strong upside momentum, and the index will continue on a downward trajectory in the longer term.



The pair has been mostly range-bound in recent weeks, trading within 5.07-5.25 support/resistance levels. Today’s candle is testing 5.07 once again but showed a lack of appetite to break below it, with narrower-bodied candles and long upper shadows. The indicators point to a change of trend on the upside, with stochastics oversold and now converging, and the MACD diff negative and rising. The next robust level on the upside is at 5.12, and if the pair breaks above it, we could see future gains to the moving averages at 5.25. On the downside, if 5.07 is broken, this could suggest further impetus to 5.05 and 5.00, respectively. We expect USDBRL to gain ground in the near term but find resistance at the shorter-term moving average levels.



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