FxWirePro: Deploy USD/BRL call spreads on momentary upside traction Brazilian lira

In this write-up, we emphasize on maintaining OW (over-weight) and positioned in 3m 1x2 BRL calls 3.95/3.80. Cheap valuations and favorable positioning suggest BRL upside. 

We refer to JP Morgan’s short-term valuation models of the BRL that ran us through 2-year interest rate differentials, soft commodity prices, 10-year US treasuries and oil prices are showing the BRL as 3.1% cheap, with a fair value at 3.81 vs. the current level of 3.93.

Although valuations are not screaming cheapness from a standardized residuals standpoint, it should keep the carry well supported. 

Additionally, BRL positions have scope to increase as international investors long USD positions are currently USD 30 billion, according to the latest BM&F data. The BCB has maintained and rolled the USD 69 billions of FX swaps but we believe that the BCB is more likely to act by increasing its bulk of FX swaps in the near term if BRL underperforms.

Regarding the next steps for the social security reform (SSR), we continue to wait for the voting outcome from the current social committee phase. 

We remain OW BRL and local rates in the Model Portfolio and recently opened 3m 1x2 BRL calls 3.95/3.80 (spot reference: 3.8580 levels). Courtesy: JPM

Currency Strength Index: FxWirePro's hourly USD spot index was at -57 (bearish) while articulating at (12:55 GMT).

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex