• FxWirePro: square off ratio spreads and uphold optionality for sluggish BRL despite GDP data announcement

    Source: FxWire Pro - Economic Indicators / 01 Sep 2017 07:34:30   Eastern Standard Time

    Brazilian GDP publication for Q2 today is likely to confirm that the recovery following the two-year recession is rather sluggish. Even though growth in Q1 was very robust at 1% qoq (seasonally adjusted) this was mainly due to a strong agricultural sector. Growth in Q2 is likely to have been much weaker at 0.1%.

    However, today’s publication is unlikely to affect the BRL. The currency benefits from the notable improvement on the political front (the corruption scandal surrounding President Michel Temer) and the continued positive environment for EM currencies.

    On the other hand we see little upside potential for the BRL. The Brazilian central bank remains in easing mode, it is still possible that Temer will have to stand down and the fiscal policy risks remain quite high.

    Option strategies:

    In our previous write ups we had advocated below option strategies, all of them in line with the our expectations as the underlying spot rates remain in the range.

    USDBRL ratio call spreads as Brazilian lira reflects broader appetite amid major trend, we close this trade as short legs seem to have been fetched handsome yields.

    We continue to maintain the below option portfolio:

    Sell 1M vs. buy 3M USDBRL ATM in vega neutral notionals.

    Buy USDBRL 1Y ATM vs sell 18M 25D strangle, 1:2 vega.

    Buy 2M USDBRL vs. sell 2M USDCLP in 100:120 vega ratios.