BOJ Raises Interest Rate to 31-Year High as Yen Weakens 
UBS Predicts Potential Fed Rate Cut Amid Strong US Economic Data 
RBA Says ASX Still Falls Short on Governance and Risk Controls 
Fed Unveils Stablecoin Rules Under GENIUS Act 
U.S. Stocks vs. Bonds: Are Diverging Valuations Signaling a Shift? 
Lithium Market Poised for Recovery Amid Supply Cuts and Rising Demand 
Moldova Criticizes Russia Amid Transdniestria Energy Crisis 
Moody's Upgrades Argentina's Credit Rating Amid Economic Reforms 
Indonesia Surprises Markets with Interest Rate Cut Amid Currency Pressure 
2025 Market Outlook: Key January Events to Watch 
Urban studies: Doing research when every city is different 
RBA Hikes Interest Rate to 4.60% as Inflation Risks Rise 
Oil Prices Dip Slightly Amid Focus on Russian Sanctions and U.S. Inflation Data 
Global Central Banks Brace for More Rate Hikes as Inflation Risks Rise 
Add as a preferred source on Google
How much further will the Brazilian central bank (BCB) cut its key rate? Today it will certainly cut it by a further 50bp to then 5%. It had signalled its willingness to do so at its last meeting in September, and the conditions for further easing are given. In September inflation stood at 2.9%, i.e. at the lower end of the BCB’s target corridor (2.75 - 5.75%). Moreover following a long-winded process the much feted pensions reform was finally passed by the Senate as well last week. As a result a major factor for uncertainty, which the BCB had also constantly referred to, has been overcome and as a consequence BRL was able to appreciate over the past days.
In addition, with the major domestic political risk out of the way after the passage of the social security reform in Brazil, and the global environment expected to be relatively benign over the next few weeks, there is room for BRL vols to catch-down to the softening in the rest of the EM vol complex over the past two weeks.
We do not expect BRL to be disrupted either by proxy hedging demand in the run-up to the upcoming Argentina election, or by the postponement of the December oil auction. 1M ATM vol (12.8) is already 1 pt. lower from its local high, and we reckon that realized vol can soften to below 10% with the SSR out of the way.
Given the flatness of the front-end of the vol curve (3M – 1M spread 0.2), we consider it prudent to quasi-hedge the outright gamma short by structuring it as a -1M / +3M straddle calendar (vega-neutral, delta-hedged).
The above chart shows that such calendar spreads capture 0.6x of the returns of standalone short 1M delta-hedged straddles on average, but the long 3M leg helps partially shield the structure from full impact of major vol shocks. Alternatively for maintenance free exposure consider 1M USDBRL vol swap @12ch vs. 1M1M FVA @12.55/13.1 indic spread, in equal vega.
Sell 1M @12.4 ch vs. buy 3M USDBRL delta-hedged straddles @12.5/12.85, vega-neutral, as a quasi-hedged outright gamma short. Courtesy: JPM
