One-month implied volatility on the Brazilian real/U.S. dollar hit a two-year high last week as the economic turmoil in Argentina continued to affect Brazil. On Wednesday, one-month vol was at 21%, according to James Kennan, v.p., Latin American currency options trading at BNP Paribas in New York. This is the highest Brazilian real vol has traded since April 1999, when Brazil was recovering from its devaluation crisis. In late March one-month vol was at 13.5%.
Kennan said that, in addition to the spillover from Argentina, one-month volatility on the real has been increasing because of political turmoil in the Brazilian senate.
The economic and political turmoil also affected the real in the spot market, as it traded at historic lows against the U.S. dollar last Monday, closing at BRL2.278, according to Kennan. The decline in the real is a sign that, in addition to their qualms about the Argentine economy, investors are concerned about a possible decline in economic growth due to the Brazilian Central Bank's decision on April 18 to raise its benchmark interest rate by half a point to 16.25%. The mid-April resignation of Senator Jose Roberto Arruda, who is embroiled in a corruption scandal, has also caused investors to view the real warily, said Kennan.
Trading was light last week. Kennan said hedgers were well aware of the problems with Brazil and Argentina, and had secured their positions in previous weeks.
EUR/JPY SPOT & ONE-MONTH VOL
