Option Traders More Confident in Real Than Any Currency on Brazil's Growth
Options traders are showing more confidence in the Brazilian real than any other major currency as Latin America’s biggest economy grows at the fastest pace in 15 years.
Three-month implied volatility on real options is 338 basis points, or 3.38 percentage points, less than the currency’s actual price swings, the biggest gap among 16 major currencies, according to data compiled by Bloomberg. As recently as May, implied volatility, which reflect investors’ expectations of future currency fluctuations, was higher than the real’s moves.
The reversal shows traders are betting the currency will be less vulnerable to declines sparked by concern the global recovery is slowing. Brazil’s economy grew 9 percent in the first quarter, the most since 1995, and the central bank forecast last week a full-year expansion of 7.3 percent.
“Brazil is still a good place to put your money,” said Flavia Cattan-Naslausky, a currency strategist with RBS Securities Inc. in Stamford, Connecticut. “Despite the growing external risks, the interest rates, the growth differentials are still there. The real will still outperform.”
Three-month implied volatility on the real rose to 16.7 percent from 13.7 percent at the end of April, while actual fluctuations surged to 20 percent from 12.2 percent. For the euro versus the dollar, implied volatility was nine basis points higher than the actual fluctuations.
The real has gained 7.8 percent since sinking to an eight- month low of 1.9153 per dollar on May 25.
Stock offerings are luring money to the country, helping fuel the real’s gains. State-owned oil company Petroleo Brasileiro SA’s planned $25 billion share sale, the largest in the Western Hemisphere in at least a decade, will go ahead in September, Energy Minister Marcio Zimmermann said July 1.
“It’ll be a rush, but it’s doable,” Zimmermann said in an interview in Brasilia.
Brazilian companies excluding Petroleo Brasileiro plan to raise $12 billion in 19 equity offerings this year, more than double the amount in the first seven months of 2009, according to Bloomberg data. International investors have bought 67 percent of the shares sold this year, according to BM&FBovespa SA. Banco do Brasil SA, Latin America’s largest bank by assets, sold $5.4 billion of shares last week.
Net inflows from trade and investment into Brazilian stocks and bonds increased 12 percent to $3 billion this year from the same period of 2009. The country’s growth rate will more than double the pace in the U.S. and top the average 5.1 percent expansion that the International Monetary Fund expects for emerging markets this year.
“There’s no panic,” said Kirill Ilinski, who oversees about $100 million as the chief investment officer at Fusion Asset Management LLP in London. His fund has gained 4.6 percent this year, beating 83 percent of its peers. “The contagion is not spreading to Brazil,” he said.
The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries widened 10 basis points last week to 247, according to JPMorgan Chase & Co. The gap reached an eight-month high of 251 on June 8 on concern a deepening debt crisis in Europe will lead the world into the second global recession in three years.
The cost of credit-default swaps to protect against a default on Brazilian debt for five years rose nine basis points last week to 140, according to data compiled by CMA DataVision. That’s less than the 10 basis-point increase in the cost to insure Mexican debt and 30 basis-point jump on swaps to protect Argentine bonds.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
The yield on Brazil’s interest-rate futures contract due in January was unchanged today at 11.31 percent, signaling traders expect the central bank to raise the benchmark rate to about 12 percent by year-end from a current 10.25 percent.
The real fell 0.2 percent to 1.7762, extending its decline this year to 1.8 percent. It surged 33 percent last year, the biggest advance among the world’s major currencies.
The central bank has purchased dollars every day since March 2009 to stem the currency’s gain and shore up exports. Policy makers have bought $14 billion in the foreign-exchange market this year, compared with $2.5 in the first half of last year, according to the central bank’s website.
“Their government is mindful of the currency strength,” said Clyde Wardle, an emerging-market currency strategist at HSBC Holdings Plc in New York. “The upside for the real isn’t what it was perceived to be in the last part of 2009. We’ll continue to see choppy trading through the summer.”
The real will end the year at 1.8 per dollar, according to the median forecast of 19 analysts in a Bloomberg survey. Traders cut their estimate from 1.72 on May 25.
The higher yields offered by Brazil’s fixed-income assets keep luring foreign investors, helping bolster the real, said David Spegel, the New York-based head of emerging-market strategy at ING Groep NV.
The yield on Brazil’s bonds due in 2012 is 11.37 percentage points higher than that on similar-maturity U.S. Treasuries, near the widest gap since January 2009, according to data compiled by Bloomberg.
“Investors feel more confident about the economic process,” Spegel said. “They feel like they’re getting sufficiently compensated because of the high yield in the domestic notes. It’s hard for investors to find reasons for the real to sell off.”