Brazilian Real Volatility Rises Amid Impeachment Speculation

  • Implied volatility highest among world's major currencies
  • Brazil credit-default swaps fell the most since 2004 in March

The cost of buying options to protect against swings in Brazil’s real rose to the highest in two weeks as investors gauge whether lawmakers will vote to impeach President Dilma Rousseff.

The increase in volatility reflects the guesswork traders are undertaking as they try to divine the chances Rousseff will be ousted, potentially clearing the way for a new government that would be better positioned to pull the country out of its worst recession in a century. The real’s 12 percent gain this year is the biggest among 150 currencies worldwide, bolstered by speculation that Rousseff will lose her battle to stay in office.

"Traders are protecting themselves ahead of a weekend which will probably have a lot of political news all over the media," said Leonardo Monoli, a partner at Jive Asset Gestao de Recursos in Sao Paulo.

The president’s office believes her allies don’t have enough votes to end the impeachment process while the opposition will fall short of the tally needed to oust her, according to a report in Valor Economico. A stalemate would threaten to drag on the political turmoil that’s settled over Brasilia since investors began looking into corruption allegations involving the country’s top businesses and politicians almost two years ago.

One-month implied volatility rose 0.5 percentage point to 23.25 percent. It is the highest among 16 major currencies tracked by Bloomberg. The real advanced 1.1 percent to 3.5538 per dollar Friday in Sao Paulo, reversing an earlier loss of 0.8 percent.

The currency advanced as the central bank refrained from calling for an auction of foreign-exchange reverse-swap contracts, that would have been equivalent to buying dollars in the futures market. The central bank resumed auctions of such contracts last month for the first time since 2013.

The lack of new reverse swap contracts from the central bank should support the real as investors have been bullish about a potential impeachment, said Ricardo Gomes da Silva, the head of currency trading at Correparti brokerage in Curitiba, Brazil.

"The past few weeks have been market by optimism among investors, maybe exaggerated," Silva said. "Everyone is watching the political context and what the central bank is doing. Still, it is hard to say at this moment for how long it might last."

The cost of insuring Brazilian bonds in the credit-default swaps market for five years declined 93 basis points in March, the steepest monthly decline since September 2005.

Swap rates on the contract maturing in January 2017, a gauge of expectations for interest-rate moves, declined 0.105 percentage point to 13.78 percent. They fell 0.05 percentage point in the week.

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