Brazil Real’s Volatility Falls to One-Year Low on Temer Optimism

  • Central bank intervention seen reducing currency swings
  • Swap rates drop as policy makers forecast to keep Selic steady

Volatility in Brazil’s real dropped to the lowest level in a year amid increased speculation that a new government will pull the nation from its deepest recession in a century while the central bank acts to limit gains in the world’s best-performing currency.

Three-month implied volatility on the real declined 0.2 percentage point to 16.75 percent on Wednesday, reaching the lowest level since July 22, 2015. The currency advanced 0.3 percent to 3.26 per dollar.

Brazilian assets have led gains globally this year amid speculation that Acting President Michel Temer will trim a budget deficit, end credit-rating downgrades and restore confidence in Latin America’s largest economy. Concern that the currency’s rally would hamper exports has led the central bank to sell almost $50 billion of reverse swaps to stem gains. While the offerings are unlikely to change the direction of the real, they can mute volatility, Morgan Stanley strategists led by Gordian Kemen wrote in a report published last week.

“All the expectations of fiscal reforms in Brazil are driving the volatility in the real down," said Mauricio Oreng, a senior strategist at Rabobank in Sao Paulo.

The cost of insuring Brazilian bonds in the credit-default swaps market for five years declined 2.3 basis point to 287.1 basis points, the lowest level since July 29 last year. Buying the real with borrowed dollars in a carry trade has returned 30 percent this year, the most among 42 currencies tracked by Bloomberg.

Swap rates on the contract maturing in January 2018, a gauge of expectations for interest rates, dropped 0.05 percentage point to 12.62 percent.

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