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Macro and Vol Commentary

Emerging markets have benefited from an increased risk appetite in November and December due to vaccine optimism. The BRL has struggled in recent weeks, will this continue?

Economic Data

The Banco Central do Brasil (BCB) suggested that economic indicators were better than expected in the closing months of 2020. However, this doesn't capture the recent rise in COVID-19 cases.

  • Q1 GDP expectations are more subdued as a result of the rise in cases, as uncertainty prevails.
  • GDP for Q3 was 7.7% q/q up from -9.3% q/q the previous month. The annual growth rate was -3.9% y/y in September; the IMF expects a contraction of 4.5% in 2020, with the economy rebounding to 3.6% in 2021.
  • The labour market remains weak, which will drag on the economy in the near term; unemployment was 14.3% in October. The participation rate has started to bottom out after falling sharply in H1 2020.
  • The participation rate was 56% as of October 2020, and we expect this to improve at the end of Q1.
  • The weak labour market will keep consumer spending muted in the near term, as they shy away from recreation, travel and food services. Air transportation was down, which is hardly a surprise, footfall at retail was down 13% in November.
  • Stimulus checks to vulnerable households were cut in half to $55 since September and expired in December. Bolsonaro suggested the country was broke and he couldn't do anything about it. His popularity dropped sharply, and ministers are considering re-introducing financial aid.
  • Some measure of the underlying inflation rate is above the range compatible with meeting the target.
  • Commodity prices have risen, and this could exert extra inflationary pressure. Inflation expectations stand at 3.4% for 2021 is the base case for the BCB, assuming the Selic rate stays at 3.25% p.a. and increase to 4.2% p.a. 2022.
  • Spare capacity in the economy and precautionary savings from consumers will weigh on inflation in the near term. Still, we expect fiscal stimulus and higher commodity prices will increase the risk premium.
  • The Selic rate remained at 2% p.a. this month, this is to aid a sustainable economic recovery. The BCB committee outline that inflation expectations are sufficiently close to the inflation target for the time horizon for monetary policy.
  • The removal of the committee's forward guidance does not imply an increase in interest rates and the uncertainty surrounding the economy prescribed accommodative monetary policy.
  • The committee remains focused on the reforms and adjustments to the Brazilian economy are essential.
  • Government support provided fiscal support worth 12% of GDP. The economy went into the pandemic with a high debt to GDP ratio, which can be maintained if GDP returns to growth and exports of commodities remain strong.
  • In Q3, the budget deficit was 17.3% of GDP with the annual deficit at 5.4%. We expect the deficit to remain high for years to come with the IMF indicating that government debt will rise to 82.8% of GDP in the next 5yrs.

According to the Bloomberg Vaccine Tracker Brazil, the vaccination rate is behind the curve, has administrated 0.28 doses per 100 people as of January 27th, which equates to 579,167 doses. The slow vaccination rate and rising cases will be a drag on the economy in the near term. However, we have seen the currency rebound at R$5.50 to the $, this level is vital. With cases rising and the vaccine rate low, there is room for improvement, and as the vaccine rate increases, we expect the Real to strengthen. The dollar has traded lower in recent months which has been a boon for commodities. Major economies demand commodities is robust and fiscal stimulus measures could support consumption for hard commodities like iron ore for steel, as we saw in China last year. In the near term, we expect the economy to struggle, but as the vaccine rate improves and economic data, we expect the real to sustain a rally towards the end of Q1. The caveat to this is President Bolsonaro, and the rest of the government need to re-introduce financial aid and execute an effective vaccine strategy.

Volatility Commentary

General Comments

With macro events like the US election and UK-EU trade negotiations concluded and Covid vaccines now being rolled out FX Macro vols have been generally stable over the last few weeks. We’d expect FX Macro vols to remain stable and potentially trend lower over the next few months though we still see potential for regional variants/lockdowns to cause sporadic short terms spikes for at least the first half of this year.


With the new variant of Covid 19 having occurred recently in Brazil has seen a rise in USDBRL vol, in the extreme short vol may remain high. We, however, would expect vols to come down over the longer term with vaccines gradually being rolled and out current vaccines still expected to be effective against new variants. We also note that despite the Covid-19 having hit Brazil hard USDBRL vol has generally realised inline or lower than implied for most of the second half of 2020 and would expect this to continue into 2021. Alongside this, we’d expect a gradual strengthening of BRL over the next few months as the vaccine rolls out.

USDBRL 1-month Implied and Realised Volatility

USDBRL Trade Idea

  • Buy 3-month Put in 10m USD Notional strike 5.1500 for circa 177k USD
  • Sell 3-month Put in 10m USD Notional strike 4.9500 (to reduce long vol exposure/upfront premium) for circa 83k USD
  • Overall strategy cost circa 94k USD

Positioning Charts

USDBRL Positioning Data 13/01/2021 - 20/01/2021

USDBRL Positioning Data 21/01/2021 - 27/01/2021

USDCNY Vanilla Options Positioning Data 13/01/2021 - 20/01/2021

USDCNY Vanilla Options Positioning Data 21/01/2021 - 27/01/2021

Charts and Tables

FX Expiries


Volatility Grid

Historical Spot FX Volatility (30D Rolling)

FX Matrix (today)

Weekly Change

Key Events & Releases

Technical Charts

JPM Global FX Volatility Index

The index has gained ground in recent sessions, finding resistance at 7.62 and the 50 DMA at 7.63. The stochastics are rising, with %K in the overbought territory, outlining the bullish sentiment. The MACD diff is positive and diverging, and if the index is to confirm the strong sentiment, the index needs to gain a footing above the 50 DMA in order to improve the outlook of a continuation of the trend towards previous days’ highs at 7.70. Conversely, a break below 7.50 could set the scene for lower prices in the medium-term 7.22. Market weakness has been robust; however, indicators point to an improving picture, and a break above the 50 DMA would confirm the outlook. 

The Dollar Index

The market has been well bid in recent sessions, breaking above the resistance at 50 DMA and 90.50. The MACD diff is positive and diverging, suggesting higher prices in the near term towards 90.95. The secondary resistance level stands at 91. This level has held firm in recent weeks, apprehension in the market at this level has capped the index on the upside. A break of this level would help confirm outlook for higher prices. On the downside, traders have rejected 91 before and could do again, triggering losses back through the 50 DMA before targeting 100 DMA at 90.28, with the psychological level at 90.


The market has strengthened significantly in recent sessions after the market corrected sharply below 5.30. The MACD diff is negative and converging on the upside. Likewise, the stochastics are edging downward, but are seen converging, outlining the outlook for waning selling pressure. The prices have been well supported at 50 DMA in recent weeks. Continued appetite above this level of 5.35 could set the scene for higher prices back to 5.50 and 5.52 – recent weeks’ highs, confirming the double top formation. A break of support could set the scene for lower prices towards 200 DMA at 5.34 in the near term. We expect the current support level of 50 DMA to remain robust and prices to edge higher in the near term.



This is a marketing communication. The information in this report is provided solely for informational purposes and should not be regarded as a recommendation to buy, sell or otherwise deal in any particular investment. Please be aware that, where any views have been expressed in this report, the author of this report may have had many, varied views over the past 12 months, including contrary views.

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.

Please contact the author should you require a copy of any previous reports for comparative purposes. Furthermore, the information in this report has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Data in this report has been sourced from Bloomberg unless otherwise stated. All information in this report is obtained from sources believed to be reliable and we make no representation as to its completeness or accuracy.

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