By the year-end, USDBRL is forecasted at 3.90 level. The road to social security reform continues to be the main driver of BRL and we maintain the view that reform is more likely to pass this year than not, which underpins our bullish BRL stance currently. FDI remains strong, fully compensating the current account deficit, and the BCB stands to back the BRL from large weakness with its stock of FX swaps.
One could sell an at expiry range as a capped downside expression of a short vol view. The structure collects the option premium. Anecdotally, investors are well subscribed for a BRL upside which could prompt profit-taking and consolidation back above 3.70 as the privatization plan (the next big item that could bring inflows into BRL) is more of a 2020 story.
Consider: 2M 3.65 – 3.90 at-expiry digital USDBRL range (sell 3.65 USD put/BRL call, sell 3.90 USD call/BRL put) for 40.65%/45.65% USD indic (spot ref. 3.7540 level).
If the range holds over the two months, sellers of the range retain the upfront premium but have a capped liability of 100% of payout if the range breaks. BRL was last time at 3.65 in February and even then only for a week. Courtesy: JPM


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