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BRL: Once again the BRL’s losses against the USD continued today. At first glance the publication of economic activity for November was positive, as it came in above expectations, but the previous months were revised to the downside. The economic optimism that emerged towards the end of last year has had a dampener.
However, this also leads to increased speculation that the central bank might cut its key rate again at its meeting in early February, which in turn is putting pressure on BRL. As the key rate has reached a historic low at 4.5% and inflation rose to 4.3% in December the market views further rate cuts with scepticism. Unless future economic data publications surprise clearly on the upside rate cut speculation is likely to persist, thus putting further pressure on BRL.
On the other hand, we do not see much more scope to the upside in USDBRL following the clear uptrend since the start of the year. Instead market participants are likely to increasingly take a wait and see approach ahead of the rate decision on 5th February. We recommend a 1x2 USDp/BRLc structure (4m, K = 4/4.20) costing 118bp.
RUB: Russian President Vladimir Putin launched a package of Constitutional changes this week, and also dismissed the existing cabinet and Prime Minister. Mikhail Mishustin will take over as PM from Dmitry Medvedev, who will reportedly continue in a specially created position on the Security Council. The changes being proposed are wide-ranging, covering presidential terms, elevation of the state council, minimum wages, power of the Upper house over the judiciary, and how to resolve conflict between international and domestic law (domestic will win).
We maintain our OW RUB stance in the GBI-EM model portfolio. RUB continues to screen favorably when compared to high-yielding EM peers, given a current account surplus, positive real yields and a supportive oil price environment. Although we expect to see further RUB outperformance, the already high levels of investor positioning remains the key risk, in our view.
Rather, the news is broadly neutral for the rouble, with some upside on account of the new PM being likely to ramp up fiscal spending promptly.
Consider: 3M delta-hedged USDRUB 1*2 ratio call spread (ATM/25D) in vega notionals @9.65ch against @10.9/11.3 indicative.
Alternatively consider a RUB – ZAR RV trade, supported by the earlier screener on skews:
¾ Sell 3M delta-hedged USDRUB 25D call @10.9/11.3 and hedge it with 3M delta-hedged USDZAR 25D call @16.325/16.725, equal vega.
INR: Despite the slew of negative headlines for India of late, the Indian rupee (INR) has been. It is in fact up 0.6% vs the USD so far this year and has held within the 70.50-72.50 range for the past five months. On the economy, it is seemingly in a dire situation of stagflation i.e. slumping growth and rising inflation. Growth slipped to a five year low of 5% yoy in Q3 2019 while inflation shot above 7% yoy in December-2019. However, the surge inflation was driven mainly by food prices and is expected to be transitory. The latest import figures for December fell for the 7th consecutive month but it was less than in previous months, suggesting early signs that imports could be bottoming out. The near term focus is clearly on the upcoming federal budget on 1-February. Watch for reactions from the rating agencies on the fiscal slippage and the new deficit targets. For USDINR, RBI will be content to see a stable USDINR for now.