Volatility Reigns in Brazil Stocks, Currency Ahead of U.S. Vote

  • Implied volatility rose the most in 11 months this week
  • With only days left until election, race is too close to call

Brazil’s real gained, reversing earlier losses, and a measure of currency volatility surged as investors chose prudence over risk ahead of U.S. presidential elections. Stocks fell.

The real’s one-week implied volatility, a measure of the cost of options to protect against declines in the currency, rose 8.25 percentage point this week to 24.95 percent, the biggest one-week increase since December. The rise underscores investor uncertainty over the outlook for emerging markets as polls show the U.S. race is still too close to call with just a few days left before American voters decide their next president.

After posting world-beating gains this year through October, Brazilian assets are taking a beating in the final weeks before the U.S. election as opinion polls show Republican candidate Donald Trump chipping away at Democratic nominee Hillary Clinton’s lead.

"Markets are completely focusing on U.S. elections," said Georgette Boele, a currency and commodity strategist at ABN Amro NV in Amsterdam and one of the real’s top forecasters last quarter. “Changes in the polls result in changes in global sentiment.”

The real gained 0.2 percent to 3.2362 per dollar Friday in Sao Paulo after declining as much as 0.7 percent earlier on Friday. The benchmark Ibovespa dropped 0.2 percent to 61,750.17, erasing an earlier gain of 1.5 percent. The gauge’s 10-day historical volatility is near a six-week high.

The Brazilian currency’s 1.1 percent decline this week shows investors are concerned the market will suffer if Trump wins and adopts protectionist policies, said Eduardo Velho, chief economist at INVX Global Partners. Policies that hinder trade with Latin American countries, along with a rise in global risk aversion, may reduce the investment inflows Brazil needs to rebound from its worst recession in a century, he said.

Swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, were fell 0.02 percentage point to 12.20 percent.

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