FxWirePro: Yet another signal from Brazilian retail sales numbers to reinforce struggling time in recessionary phase – RVs and Outright BRL trades

The retail sales in Brazil illustrated once again as to how wobbly the economic recovery in Brazil is following two years of recession. In March sales fell by 1.9% MoM (on a seasonally adjusted basis). Following the inflation data on Wednesday the economy provides another reason for the Brazilian central bank to cut its key rate further. The solid BRL provides the necessary pre-condition.

BRL was unaffected by the data publication and the prospect of a further 100bp rate cut at the end of May. That is likely to remain the case for now, unless the positive market sentiment changes. In that case the Brazilian central bank is likely to pull the plug and be more cautious with its rate decisions so as to limit the damage to BRL. Currently, there is no need for that though.

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