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FxWirePro: Driving forces of BRICS currencies and hedging perspectives (Part 1)

BRL: Latin American GDP will contract by 1.1% in 2016, badly hampered by Brazil, which will again show a significant (3%).

The Brazilian economy shrank 0.3% over the Q1 of 2016, following a downwardly revised 1.3% contraction in the previous period and beating market expectations of 0.8% decline. 

Brazilian monthly retail sales have been improved but missed the estimates on YoY basis.

From a week or so BRL began losing against the dollar, while we are firm with our previously advocated strategy, so one can go long in USD/BRL 1Y ATM call vs sell 18M strangle, 1:2 vega.

RUB: RUB: On Friday CBR lowered interest rates by 50 bps, taking the main refinancing rate to 10.5%. This was widely expected by the analyst community and didn’t result in any significant market moves on the day. The most notable development from CBR is that they stated their intention to maintain real interest rates at between 2.5-3% over the medium term.

Should inflation remain around current levels this implies that base rates can reach 9.5% by the year end. Consequently, we think there is room for further front end yield compression which will benefit both local currency and hard currency bonds.

For the RUB, as long as oil prices trade above 50 USD per barrel we think towards year end only a very modest depreciation is likely, consistent with shrinking interest rate differentials.

Hence, RUB among few EM currency space typically held firmly against the dollar in the recent past, so, sell 1M USD/RUB (1.5%) OTM calls vs buy 6M ATM delta calls, use European-style options.

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