FxWirePro: Hedging framework for vulnerable BRL

Brazil's worsening fiscal outcomes amid slowing growth is being perceived as implying tolerance for higher inflation. BRL weakness has happened alongside higher breakevens, but it still looks expensive adjusted for credit quality.

We don't foresee any traces of price recoveries for Brazilian currency and instead USDBRL's long term uptrend should prolong to keep BRL in more vulnerable condition. Buy debit call spread (1x1) of USDBRL with 2M expiry (spot ref: 4.0878) call spread with strikes at 3.85 and 4.10, respectively. Indicative premium of 2.0% and a 3:1 risk reward.

DV01 neutral steepener in NTN-Fs, buying the '18s and selling '25s with an initial target of 125bp and a stop loss of -40bp (ref: -2bp). We recommend holding the position at least throughout the rest of the year, implying a carry and roll down of - 17bp and a 2:1 risk/reward. Risk premium is likely to rise further and BRL NTN-F curve looks still very flat compared with CDS and breakeven steepening.

Maintain neutral bias on Brazil sovereign: Valuations are generous, but the lack of economic and political catalysts and potential further rating downgrades warrant caution. We recommend exposure in the medium part of the curve (Brazil '25s) in particular. Technicals in that sector are supportive as positioning has likely turned light, a sizeable short base remains and new supply is unlikely. In corporate credit, we recommend buying some systemically important quasi-sovereigns, hedged with Brazil sovereign bonds: Petrobras in particular.