We add short EM vol risk on positive developments this week, selling 1Y USD/TRY vols after unexpected CBRT hawkishness, and -1M/+3M vega-neutral calendars in USD/BRL to fade the mid-week vol uptick driven by local and NAFTA political noise.

Stay overweight FX in GBI-EM model portfolio, mainly via Latam. Country overnights are TRY, ARS, BRL, and COP.

The BRL has been stuck between 3.0-3.2 since the end of January and it is now trading at the upper end of the range.

Commodity prices that are important to Brazil that have been slumping massively in recent times – sugar (-25%), iron ore (-30%), soybean (-10%), and oil (-14%) - have plunged in last few months, so terms of trade are working against the currency at the moment.

But the resilience of the BRL reflects the broader appetite for carrying and local factors. The market is largely pricing in a positive pension reform story and the risks are for weaker FX and higher mid-to-long tenor rates in the case of significant dilution or delay.

We prefer to stay on the sidelines in USDBRL and see if the upper end of the range (3.20) holds; a break above could see crowded carry positions squeezed.

Sell 1M vs. buy 3M USDBRL ATM in vega neutral notionals.

Buy USDBRL 1Y ATM vs sell 18M 25D strangle, 1:2 vega.

Buy 2M USDBRL vs. sell 2M USDCLP in 100:120 vega ratios.

Buy 3M USDINR 25D RR vs. sell 3M USDBRL 25D RR.