Brazilian real struggles to recover despite easing uncertainties

The Brazilian real was unable to recover completely from the panic sell-off that took place after the alleged corruption of President Michel Temer. After spiking USD/BRL to 3.40, the real stabilised at between 3.25-3.30, far above the 3.10 level prior to the revelations. However, several indicators suggest that the level of uncertainty has decreased substantially.

First, interest rates erased almost completely gains with the 2-year swaps rates easing to 9.22% compared to 11% on May 15th. On the longer end of the curve, the move is similar as the 10-year sovereign yields eased to 10.37% compared to 11.73%. However, the only black mark is on the CDS rates side. CDS rates on Brazilian sovereign debt have not return to their pre-revelation levels yet - the 5-year and 10-year are still higher by 40bps and 46bps, respectively - suggesting that investors are still worried about further turmoil in the political landscape. We believe it is just a matter of time.


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Secondly, the level of implied volatility has been decreasing over the last few weeks. 1-month ATM implied volatility on USD/BRL has returned to 12.6% on Monday compared to more than 23.3% a month ago. Furthermore, the 1-month 25-delta risk reversal measure, which measures the difference between the price of a call and a put, has eased to 2.51% from more than 5% in mid-May, suggesting that the market is not anticipating further upside in USD/BRL.

Overall, it seems that the market still needs time to digest the latest political developments in Brazil. We believe that the real has room to appreciate against the greenback and we anticipate that USD/BRL has only one way to go: down.

This report has been prepared by AC Markets and is solely been published for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any currency or any other financial instrument. Views expressed in this report may be subject to change without prior notice and may differ or be contrary to opinions expressed by AC Markets personnel at any given time. ACM is under no obligation to update or keep current the information herein, the report should not be regarded by recipients as a substitute for the exercise of their own judgment.