Brazil Real Volatility at 12-Month Low as Bank Retires Swaps

  • Central bank has unwound $46.8 billion of currency swaps
  • Impact of bank’s intervention to be seen in volatility: MS

The cost of buying options to protect against swings in Brazil’s real held close to its lowest level in a year as the central bank unwinds its swaps program.

Three-month implied volatility dropped 0.01 percentage point to 17.51 percent, the lowest level since July 30, 2015, on Tuesday, falling as low as 17.46 percent on Wednesday before closing 0.03 percentage points higher on the day. The real advanced 1 percent to 3.2643 per dollar on Wednesday, the most among major currencies.

Brazil’s new central bank chief Ilan Goldfajn aims to reduce the stock of foreign-exchange swaps to zero from $60 billion while relying on the country’s reserves to provide confidence to investors, according to an interview with the Financial Times. Since March, Brazilian policy makers have sold $46.8 billion of reverse currency swaps to stem the real’s world-beating gain and reduce the stock of swaps outstanding. While unwinding the contracts is unlikely to change the direction of the real, it can mute volatility, Morgan Stanley’s strategists led by Gordian Kemen wrote in a report published Wednesday.

"The central bank has signaled a willingness to intervene between 3.20 and 3.35, but stopped unwinding above that level," they wrote. "The main impact of BCB intervention will be seen more in volatility levels than BRL spot levels."

Brazilian assets have soared this year on prospects that a new government may be able to restore confidence and curb a record budget deficit. Morgan Stanley recommends investors buy the real when it dips.

The cost of insuring Brazilian bonds in the credit-default swaps market for five years declined 1.8 basis point to 293.5 basis points, the lowest level since July 31 last year.

Swap rates on the contract maturing in January 2018, a gauge of expectations for interest rates, dropped 0.2 percentage point to 12.68 percent.

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