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BRL has been one consistent standout currency on the above carry-vol metrics for assessing cheapness of skews. That’s further supported in 1stchart where BRL is the only USD pair that checks all the boxes. Sentiment toward BRL has been largely supportive and our Latam analysts continue to see it as a buy. That is not necessarily negative as grind lower in USDBRL is likely to lead to softer realized vol which would be supportive of the short USDBRL put leg.
Moreover, following the latest rebound in static carry (total return from delta-hedged 3M USDBRL 25D risk reversal, assuming unchanged markets – 2ndchart), delta- hedging now again pays for the skew decay. In other words, this offers the opportunity of entering a long convexity trade for higher USDBRL and receiving a positive, albeit tiny, time decay for doing so. As we can see from the bottom chart, the actual performance of the long USDBRL risk- reversal construct has been well explained by the static, or ex-ante proxy of, carry.
We recommended buying a 3M USDBRL 25 delta risk-reversal, delta-hedged, @ 1.8/2.15 vols, at spot ref. 3.7594 levels. We would like to uphold the same strategy going forward.
Another possibility would involve favouring the box risk- reversal implementation, by shorting the 3M USDBRL 25-delta put and buying the 6M USDBRL 25-delta call. The flattish term structure in the 3M-6M segment, and the possibility of earning a higher Carry due to the higher Gamma embedded in the short leg could favour this latter implementation, as we had pursued last week on a similar structure on USDMXN. Courtesy: JPM
Currency Strength Index:FxWirePro's hourly USD spot index is inching towards -24 levels (which is mildly bearish), while articulating (at 13:28 GMT).
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
