Brazilian real struggles to recover despite easing uncertainties
The Brazilian real was unable to recover completely from the panic sell-off that took place after the alleged corruption of President Michel Temer. After spiking USD/BRL to 3.40, the real stabilised at between 3.25-3.30, far above the 3.10 level prior to the revelations. However, several indicators suggest that the level of uncertainty has decreased substantially.
First, interest rates erased almost completely gains with the 2-year swaps rates easing to 9.22% compared to 11% on May 15th. On the longer end of the curve, the move is similar as the 10-year sovereign yields eased to 10.37% compared to 11.73%. However, the only black mark is on the CDS rates side. CDS rates on Brazilian sovereign debt have not return to their pre-revelation levels yet – the 5-year and 10-year are still higher by 40bps and 46bps, respectively – suggesting that investors are still worried about further turmoil in the political landscape. We believe it is just a matter of time.
Secondly, the level of implied volatility has been decreasing over the last few weeks. 1-month ATM implied volatility on USD/BRL has returned to 12.6% on Monday compared to more than 23.3% a month ago. Furthermore, the 1-month 25-delta risk reversal measure, which measures the difference between the price of a call and a put, has eased to 2.51% from more than 5% in mid-May, suggesting that the market is not anticipating further upside in USD/BRL.
Overall, it seems that the market still needs time to digest the latest political developments in Brazil. We believe that the real has room to appreciate against the greenback and we anticipate that USD/BRL has only one way to go: down.
Swiss economy: Low inflation is still a concern for Bern
A week after the SNB kept rates unchanged, the State Secretariat for Economic Affairs in Bern has issued economic forecasts for Switzerland. The GDP growth in 2018 is expected to reach 1.9% y/y (currently at 0.9%). In the same time, the SECO is forecasting exports to reach 3.7% (currently below 3%). Imports are also expected to take a jump to 3.8%. Consumer prices forecasts are the one weak point and the SECO sees consumer prices declining by 0.3% a year from now.
The strong franc has not prevented the SECO from showing its optimism on the Swiss economy. We tend to believe that current levels are still sustainable for the Helvetic country. In the same time, FX reserves are reaching almost CHF 700 billion which shows the massive effort to stabilise the CHF. We do not believe that the central bank will diminish its intervention and the balance sheet is set to stay very large.
Upside pressures on the CHF will likely continue. The currency is very dependent on the ECB monetary policy. In the medium-term, markets seem to expect the ECB to provide some hints about a further tightening path, which would provide some relief to the currency. For the time being, we remain long CHF.
