FxWirePro: What is driving BRICS currencies and hedging vehicles (episode 1)

BRL: Since it was widely anticipated that the Brazilian central bank (BCB) would most likely cut its key rate again. Therefore the decision on Wednesday did not surprise.

Nevertheless, the fact that the BCB mentioned a further rate cut in its statement came in as an astonishment indeed –as the central bank has been fixing the markets for an end of the cutting cycle. Previous meeting back in late February had indicated that a pause would be likely at the next meeting. We now know that despite this signal it cut interest rates this time.

However, the conditions were very constructive: unexpectedly low inflation, stable BRL. Skepticism seems to have spread on the market that this will remain the case. Accordingly, after the dovish statement, BRL came under pressure. It is worth remembering though: just as it reacted flexibly to the favorable conditions this time around it might leave the key rate unchanged at its next meeting in May despite the current signals if, for example, inflation was to take off. The central bank is likely to continue its cautious monetary policy and therefore does not constitute a danger for BRL.

Trading tips: Hold 6m USDBRL topside seagull.

RUB: CBR holds its MPC meeting for March today, the base rate is expected to cut by 25 bps to 7.25%. A 50bp cut will also likely be debated by policymakers, but ultimately not adopted. Since the rate cut last month, economic indicators from Russia have mostly softened. The Economy Ministry's monthly GDP indicator decelerated; industrial output growth slowed sharply, and CPI inflation at 2.2% is well below CBR's target of 4%.

While ruble may not seem actually robust at the moment, USDRUB has been broadly sideways over the past quarter – but this is against a background of weaker EM FX in general. Looking at crosses cross such as TRY-RUB, the Russian currency has outperformed by around 4.25% since the beginning of the year. All these factors facilitate the next rate cut by CBR today.

We expect to hear from CBR that room for larger step-size does not exist any longer as some major central banks are hiking rates. We expect the base rate to reach 6.5% by the end of this year – in other words, three more 25bp cuts after today. We expect to receive signals today about what the timing of the next rate cut could be. Overall, the developments should prove to be RUB-neutral.

Trade tips: We initiate an equally weighted basket of 6M EURUSD and EURCAD straddles (€85K vega each) vs. selling €100K vega of 6M 30D EUR calls/RUB puts.

The RV is better expressed in longer expiries (6M – 1Y) than in short dates since the implied –realized premium in RUB widens as one goes further out the curve, and also because the belly of the curve is the best value sector of the EURUSD surface to buy. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly EUR spot index is inching towards -9 levels (which is neutral), while hourly USD spot index was at a tad below -126 (highly bearish) while articulating (at 11:50 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex.

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