Japan Economy Minister Downplays Inflation Risks Despite BOJ Warning 
Australia Inflation Cools as Core CPI Misses Forecasts, Easing RBA Rate Hike Pressure 
RBI Holds Repo Rate at 5.25% as Inflation Risks and Global Uncertainty Persist 
BOJ Seen Holding Rates at 1% While Keeping Inflation Risk Warning 
China Holds Loan Prime Rates Steady for 14th Month as Economic Recovery Remains Uneven 
Gold’s Bull Run Intact: Safe-Haven Bids Overpower Treasury Yield Pressure 
Chile Central Bank Holds Interest Rate at 4.5% as Inflation and Global Risks Persist 
Eurozone Bond Yields Fall as Oil Slump Eases Inflation Fears Ahead of Central Bank Meetings 
One might be forgiven for wondering what’s going on with BRL. Despite Brexit and the initial wave of risk aversion BRL illustrates the best performance in the entire EM universe since the end of June, up more than 3.5% against the USD. In our stance this stems from two dynamics:
- Primarily because the markets hypnotize that there is minute chance of Fed rate hikes due to Brexit concerns and global slowdown, meaning that investors favour carry trades over the summer months.
- Secondarily, unlike other EM central banks, BCB seem in no rush to reduce interest rates.
This latter factor could change soon and this week’s CPI print will play a large role if it comes in below expectations of 8.8%. Assuming it prints in line with expectations this still gives BRL real interest rates of nearly 5.5%.
In our view, once inflation illustrates further consecutive declines BCB will pull the trigger and lower rates, meaning that the shine should come off the real somewhat. In the meantime, it’s hard not to like the carry.
However, the dollar strength relies on weakness elsewhere but the ECB and BOJ are almost out of room to ease further. Therefore, Fed may consider approaching monetary policy changes in most likely in this December.
Hence, we are firm with our previously advocated strategy, so one can go long in USD/BRL 1Y ATM call vs sell 18M strangle, 1:2 vega.
