BRL sell-off intensifies as polls favor Rousseff's victory

Forex News and Events

In Brazil, the second round of the presidential elections is due on October 26th. As the weekly closing bell approaches, the volatilities in BRL should remain elevated. USD/BRL’s 1-month implied volatility spiked above 26% on week to October 24th as speculative trades, leveraged bets were the major source of vol. The event risk is very high and the sensitivity to election polls, surveys and political views/comments may trigger two-side volatility pre-weekend.

USD/BRL hit the fresh 6-year high of 2.5179 yesterday, the direction post-election remains uncertain. We stand ready for a post-election relief rally in BRL, especially if the presidential course resumes with the opposition candidate Aécio Neves’ victory. Neves program is mostly favored by investors as he is expected to run a market-oriented policy, to promote economic liberalization, to simplify Brazil’s complex tax system and to fight the overheating inflation. Given sizeable leveraged bets, the USD/BRL has room to fall towards Fibonacci 50% retracement on September rally (2.36s) before the Real positioning stabilizes on macro-related allocations. A victory for Rousseff however will certainly let slip some disappointment on the market place. The Brazilian economy certainly needs to take a fresh breather. Given the macro fundamentals, another four years of Dilma Rousseff’s interventionist regime is the scenario many wish to avoid, although Rousseff is expected to lean towards a less interventionist framework. The latest election polls showed Rousseff’s advance on Neves. According to Ibope survey, Rousseff would collect 49% of votes versus 41% for Neves. Datafolha predicts 6 percentage points advance for Rousseff. The volatilities are expected to remain high before the closing bell as speculative positions should remain on the driver seat. The BCB sold 196.5 million dollar FX swaps today and rolled over 392.6b million dollar contracts to temper the BRL-sell-off. Should the selling pressures clear 2.50 offers on Monday, eyes will shift to 2.62s (almost 10 year highs, reached end-2008).

On a side note, we remind that the Brazil’s CPI accelerated to 6.75% on year to September – above the BCB’s 4.5% (+/- 2%) target band, while the GDP q/q contracted for the second consecutive quarter in 2Q (-0.6% q/q vs -0.15% in Q1). The current account deficit reached 3.77% of the GDP (largest deficit since 2002) rising the BRL-vulnerability to US dollar. The macro picture suggests a weaker BRL moving towards the Fed normalization. High UST-sensitivity should keep the downside pressures high in BRL vs. USD.

The Brazil Central Bank will announce policy on October 29th and is expected to maintain the Selic rate unchanged at 11%. Given the dovish shift in Fed’s first rate hike expectations and lower oil prices (good for narrowing the current account deficit), we do not see emergency to proceed with rate action while the 3Q GDP expectations are not brilliant. According to a recent Bloomberg survey, the Brazilian GDP should contract by 0.3% in 3Q, followed by -0.1% in Q4 before getting back in positive territories. Despite inflationary pressures, the growth risk should push the BCB to maintain its rates unchanged for the year-end.

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Today's Key Issues (time in GMT)

2014-10-24T14:00:00 USD Sep New Home Sales, exp 470K, last 504K
2014-10-24T14:00:00 USD Sep New Home Sales MoM, exp -6.80%, last 18.00%
2014-10-24T16:00:00 EUR FR Sep Total Jobseekers, exp 3419.0k, last 3413.3k
2014-10-24T16:00:00 EUR FR Sep Jobseekers Net Change, exp 5.9, last -11.1

The Risk Today

EURUSD's recent bounce is likely over. As a result, a full retracement towards the key support at 1.2501 is favoured. An initial support can now be found at 1.2614 (23/10/2014 low). An hourly resistance lies at 1.2743. In the longer term, EUR/USD is in a downtrend since May 2014. The break of the strong support area between 1.2755 (09/07/2013 low) and 1.2662 (13/11/2012 low) has opened the way for a decline towards the strong support at 1.2043 (24/07/2012 low). As a result, the recent strength in EUR/USD is seen as a countertrend move. A key resistance stands at 1.2995 (16/09/2014 high).

GBPUSD has failed to invalidate its succession of lower highs. A break of the hourly support defined by the 61.8% retracement (1.5995) would favour a further decline towards the support at 1.5877. An initial resistance now lies at 1.6079 (intraday high), while a key resistance stands at 1.6227. In the longer term, given the significant deterioration of the technical structure since July, the strong resistance area between 1.6525 (19/09/2014 high) and 1.6644 (01/09/2014 high) is expected to cap any upside in the coming months. Monitor the current consolidation phase near the strong support at 1.5855 (12/11/2013 low).

USDJPY remains strong, as can be seen by the break of the resistance at 107.59. Another resistance lies at 108.74. Hourly supports can be found at 107.43 (intraday low) and 107.10 (intraday low, see also the rising channel). A long-term bullish bias is favoured as long as the key support 100.76 (04/02/2014 low) holds. Despite the recent decline near the major resistance at 110.66 (15/08/2008 high), a gradual move higher is eventually favoured. Another resistance can be found at 114.66 (27/12/2007 high). A key support lies at 105.44 (02/01/2014 high).

USDCHF has thus far failed to break the resistance at 0.9562. An initial support now lies at 0.9514 (intraday low), while an hourly support stands at 0.9473. Another resistance can be found at 0.9593. From a longer term perspective, the technical structure favours a full retracement of the large corrective phase that started in July 2012. As a result, the recent weakness is seen as a countertrend move. A key support can be found at 0.9301 (16/09/2014 low). A resistance now lies at 0.9691 (06/10/2014 high).

Resistance and Support: