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Macro and Vol Commentary

USDBRL has weakened after testing resistance at 5.80 in February and March; with the Selic rate rising, what is next for USDBRL.

Economic data

  • Brazil’s economy contracted in recent months, but by less than expected, the economy contracted 1.6% m/m but gained 6.29% y/y in March.
    • The better than expected performance has boosted the 3month average economic performance with growth at 2.3%q/q and 2.3%y/y.
  • Retail sales were -0.6% m/m, above expectations which were -5.1% y/y, with the y/y sales at 2.4% y/y. Consumer confidence has also been improving to 72.5 in April from 68.2 in March.
  • Unemployment is still high at 14.4% in February, but this was higher than the previous month at 14.2% in January. As the economy improves, we expect unemployment to rise in March, but as we approach May and June, the labour market will improve.
    • Brazil has administered 63.2m doses; for the labour market to improve, the vaccination needs to pick up pace in the long run.
  • The economy is starting to recover; we expect high-frequency indicators to trend higher through April. Industrial production was strong in May at 34.7% y/y, but the m/m reading declined by -1.3%. This shows a clearer picture because the y/y figures are likely to be distorted.
  • The manufacturing PMI was 53.7 in May, moderately below the previous month at 52.3; the April reading is a 10-month low.
    • Business sentiment has improved, and this will support job creation in the longer run. Firms are expecting orders and investment to improve.
    • Costs are increasing, and output charges continued to rise.
  • Services and composite continue to lag and are contractionary at 42.9 and 44.5, respectively. Services have been impacted the most during the pandemic; in our opinion, the services sector will remain subdued in the near term.
  • Inflation is rising, and EM currencies are likely to feel the pinch before major economies. The rise in raw material prices in conjunction with agriculture and oil prices has prompted the central bank to increase the Selic rate to 3.5%.
    • Coupons inflation expectation is that inflation will reach 5% in 2021, before moderating to 3.6% and 3.25% in 2022 and 2023, respectively.
    • Stimulus measures have supported the economy and continue to present upside risks to inflation.
    • IBGE inflation IPCA was up 0.3% m/m and 6.76% y/y
    • Weekly CPI is also rising at 0.3% for May 23rd
    • FGV inflation IGP-10 m/m beat expectations at 3.83% in May
  • Brazil economy has benefitted from the demand for agriculture and raw materials; the trade balance stands at $10,349m for April, exports reached $26,481m, with imports at $16,132m


  • The public sector reported a BRL 5bn in March; this was basis a BRL 23.7bn in March 2020.
  • The government and the regional governments recorded a surplus of BRL 3.9bn and BRL 1.1bn, respectively. The consolidated public sector registered a BRL 51.6bn surplus in Q1 2021
  • In the 12 months to March, nominal interest reached BRL 309.9bn (4.1% of GDP), the nominal deficit totalled BRL 973bn (12.89% of GDP)
  • Public sector net debt as a percentage of GDP reached 61.3% in March; this is expected to rise by 61.6% in April, PSND reached BRL 4,622.7bn in March.
  • The general government gross debt reached BRL 6,721.1bn in March, equating to 89.1% GDP, debt continues to rise, and stimulus remains elevated.
  • Monetary base reached BRL 385.2bn in March, up 25.3% in the last 12 months. Operations with the federal government debt securities accounted for an expansion of BRL 75.5bn with net purchases of BRL 72.3bn.
  • M1 money reached BRL570.3bn in March, down 0.5% in March; this reflects the decline in the currency.
  • M2 increased in March to BRL 3.9bn even though we saw a decline of 0.5% in the M1 balance, the growth related to an increase in the balance of securities issued by financial institutions to BRL 2.3trn.


  • We have seen outflows of funds from the BRL last week with an average flow at -1.16, with the 4-week flow at -1.39. Corporates also saw a decline in 1-week flow by -2.4; the 4-week flow is -2.18. Leveraged and real money both increased by 1.2 and 1.65, respectively.
  • The correlation of the flow and daily currency return shows real at 39.6% for the last 4 weeks, but the leveraged segment shows a positive correlation for most time intervals except for 26 weeks which is negative. The correlations for 4-weeks, 13 weeks and 52 weeks stand at 26.14%, 20.83%, and 18.71%, respectively.
    • Corporates have a negative correlation for these time segments – the most significant being 4-weeks at 26.58%.

The Brazilian economy is showing signs of improvement ahead of expectations, but the tightening of monetary policy has been the key reason behind the rally in the BRL in recent weeks. EMs are more exposed to inflationary pressures, even with Brazil as a significant exporter of commodities. We expect more tightening as banks curb inflationary pressures and the Fed maintains their current lower-rate environment. The dollar is expected to weaken, with some central bankers wanting to curb liquidity and bond-buying. The BRL is still trading a wide range, and in our opinion, trading will remain in this range, but with the market pricing a further 300pps this year, if the pace of hikes is not in line with market expectations, we could see USDBRL weaken towards the highs once again. The IPCA is the reference for the Brazilian inflation target, and if the market this rate is soft, we would expect fewer hikes this year.

Volatility Commentary

Over the end of March and April, we saw USDBRL weakening despite Brazil becoming a main epicentre for the Coronavirus, however, this was reflected in vols with USDBRL vols rising in March and realising over implied over this. However, since mid-March (alongside spot) implied vols have come down with realise vols dipping back below recently implied vols, with both spot and vol trading in a stead range since the start of May with much of the World’s attention now moving the Coronavirus situation in India. Despite the Coronavirus situation still being dire in Brazil, USDBRL spot already having shown potential to buck usual convention in the face of a dire Coronavirus situation and alongside recent BRL rate hikes we see potential for USDBRL to continue to drip lower, with this in mind we’d also expect the trend in vols to continue with implied vols dripping lower and realising lower than implied.

USDBRL 1-month Realised and Implied Volatility

USDBRL Trade Idea 

  • Buy 1 month expiry EKI Put option, strike 5.150 with barrier 5.000, premium cost circa 135k USD (for reference equivalent vanilla cost is circa premium cost 208k USD)
  • To reduce up front premium cost/long vega cost sell Call Spread with strike 5.2500 and 5.4500 for circa 82k USD
  • Total premium upfront cost circa 53k USD up front premium

Positioning Charts

USDBRL NDO Positioning Data 18/05/2021 - 25/05/2021

The options market favours puts in the near term, options executed in chart 1 are slightly sporadic but put options have larger notional values suggesting more conviction. The range for put options is predominately 5.10-5.30, with call options at 5.30-5.50. There is a strip of options that are due to expire in July with a range of 4.90-5.30 and the market. Chart 2 shows two clear strips of put options executed with large notional values, the range is 5.10-5.70 which is considerably wider than previous weeks and months. The spot market is at 5.15 as of June 2nd and some of the puts are above the market. There is another stip of options due to expire in July with larger notional values than the previous week, and the range is 5.10-5.50 which is narrower than the previous week. 

USDBRL NDO Positioning Data 25/05/2021 - 01/06/2021

USDCNY Vanilla Positioning Data 18/05/2021 - 25/05/2021

The options market shows more options executed in the week to June 1st, options executed this week have a range of 6.30-6.50 but as you move towards July 23rd the range is wider at 6.52-6.65. The market continues to favour the downside, this has led the market to post a fresh 3 year high. There has been a moderate correction to the upside but we expect this to be sold into. A correction above 6.45 could see more upside covered purchased but we do not expect this to be sustained. Chart 2 shows traders favour the downside. 

USDCNY Vanilla Positioning Data 25/05/2021 - 01/06/2021

Charts and Tables

FX Expiries

Volatility Grid

Historical Spot FX Volatility (30D Rolling)

FX Matrix (today)

Weekly Change

Key Events & Releases

Technical Charts

JP Morgan Global FX Volatility Index 

Selling pressure has been moderate recently, causing the indicators to fluctuate considerably. The MACD diff positive and the stochastics have converged on the upside; the RSI is in the neutral territory, confirming market uncertainty around the direction of the move. The selling pressure looks set to reverse in the near term, we could see the market gain ground towards 50 DMA at 7.079, where we have found resistance in recent sessions. On the downside, in order to regain downside conviction, the market needs to break back below 7.01 and then target 7.00.

Dollar Index

The index has improved in the recent sessions and has breached the 100 DMA resistance at 90.06 and closed at 90.071. The stochastics are rising, with %K/%D converging, which is a signal of waning buying pressure. The MACD diff is positive and diverging, suggesting we could see a push higher in the near term. The index needs to hold above the 100 DMA level before it could target 90.44. On the downside, the break below 50 DMA at 89.91 could pave the way for 89.66 support. The moving averages are edging lower, and a break above them could set the scene for bullish momentum.


The pair has weakened after rejecting 5.20, with selling pressure prompting a test of support at 5.1412. The stochastics send a sell signal, with %K/%D converging on the downside in the oversold and MACD diff is negative and lacks conviction, suggesting a deteriorating outlook. A breakthrough 5.1412 to 5.10 would confirm further bearish momentum. On the upside, a break back above 5.20 could confirm the change of trend. Indicators point to a continuation in negative momentum, and rejection of prices above 5.10 would point to further weakness in the pair in the near term.



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