Itaú BBA - Rising Volatility in the FX Market

FX and Capital Markets

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Rising Volatility in the FX Market

March 23, 2015

The exchange rate was highly volatile last week. Along with domestic political and economic uncertainties, the FOMC’s decision also influenced the currency.

(full report attached)

Internal and external drivers added volatility to the foreign exchange market last week.

The exchange rate was highly volatile last week, trading between 3.20 and 3.30 reais per U.S. dollar. Along with domestic political and economic uncertainties, the FOMC’s decision also influenced the currency. The exchange rate closed the week at 3.23 reais per dollar, strengthening 0.6% from the previous week’s closing price (Charts 1, 2, 3 and 4).

Central bank continued to intervene in the FX market.

The monetary authority continued  to roll over contracts expiring in April at a pace of 7,400 contracts per day, confirming the rollover of 78% of the total batch if this pace is sustained until the end of the month (Charts 5 and 6).

Currency flow was negative in the past week.

The currency flow was negative during the second week of March, with trade and financial outflows (of $294 million and $496 million, respectively). Nonetheless, the currency flow is still positive in March, by $2.3 billion (Charts 7 and 8).

No new bond issuance overseas in the past week.

Another week passed without any bond issuances in the external market. So far, issuances add up to $400 million year-to-date (Chart 9 and table).

Foreign flows to the stock market are negative in March.

Foreign flows to the stock market are negative by $203 million in March, with outflows from the futures market, but inflows to the spot market (Chart 10).

Institutional investors increased their long FX derivatives positions last week.

In the past week, institutional investors increased their long positions in FX derivatives, particularly dollar futures, to $29.9 billion. Meanwhile, banks and non-residents reduced their positions to $40.3 billion and $39.5 billion, respectively (Charts 11, 12 and 13).

Outflows from equity and fixed income funds dedicated to Brazil in the past week.

The week ended on March 18 posted net outflows from both equity funds ($223 million) and fixed income funds ($117 million) (Charts 14 and 15).

 



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