Brazilian assets in the doldrums
Over the last few days, both Brazilian stocks and the real suffered major losses amid rising heightened uncertainties about the upcoming presidential elections. On Monday, the Bovespa index fell 1.78% to 83,307 points. The 1-month implied volatility also edged above the 20% level to 21.85%. Overall, the stock market was only moderately impacted by the local political developments. On the other hand, in the FX market, traders were more nervous against the backdrop of a potential trade war between the two largest economies.
On Monday, the Brazilian real slid 1.54% to its lowest level since December last year as USD/BRL hit 3.4219. Developments in the option market suggest that traders are buying protection against further depreciation of the real. The 6-month 25-delta risk reversal (the difference between call and put prices) jumped 45bps to 2.3575% amid mounting worries that a less market friendly candidate will take over Michel Temer in October general election. Indeed, international investors are always dubious about left-wing candidates. As an indication, CDS rates started to build upside momentum with the 10-year rates inching up to 272bps, while the 5-year one rose to 169bps.
Given the uncertainty generated by the political situation, investors will most likely stay away from Brazilian assets. In addition, the interest rate differential has narrowed significantly, as it decreased from around 12% in 2017 to around 5.8% today, making carry trade less interest especially in such an environment.
Japan balance of payment is taking off amid higher consumer confidence
Though an inflation below its 2% target (1.50% as of February 2018) adding up with the challenging task of changing its population’s “deflationary” state of mind, Japan economy remains solid. Following recent modest slowdown in first quarter Tankan manufacturing indicator (given at 24 while previous estimated at 25), Japan recent data releases are pleasing, starting with February balance of payments that recovers from recent December 2017 – January 2018 declines, given at JPY 2’076 billion (USD 19.5 billion), valued above its 2 years average of JPY 1’723. Largest contributors being for instance Goods and Services +3’114 (previous: -8’348). Though a slight decline in business sentiment and weak private consumption in February (monthly retail sales at +0.40%), Japan consumer confidence remains strong for the month of March, in line with previous month number of 44.3 and remaining at 5 years highs, thus confirming the view of a rather strong economic growth potential.
Suffering from continued currency appreciation, Japan current challenge lies in devaluing its currency, despite continued dovish monetary policy initiated by Bank of Japan Governor Kuroda who maintains the key rate in the range of 0% – -0.10% since February 2016, a measure that seems to falter since the beginning of 2017 (USD/JPY: -8.54%). Accordingly, USD/JPY currently trading at 106.98 is expected to continue its bullish trend started in March 25th, bouncing off from 104.56 low and approaching hourly resistance given at 107.90 (14/02/2018 high). Expected to head along the 107.25 range in the short-term.
