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Bank Of America Open Long BRL/JPY Trade

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  • Bank of America have recently opened a long BRL/JPY trade, currently at 30.11, noting that the trade has a positive carry of 4.5% and expected return of 11.1%, with a Sharpe ratio of 1.
    • BofA say that from a valuation standpoint, BRL is cheap and should benefit from high real rate differentials and positive economic growth surprises. They believe that growth will continue surprising to the upside despite recent consensus forecast upgrades.
    • They note that positioning is also now more balanced after local funds cut their net long BRL futures positions in half.
    • The BCB has shifted its tone to a more hawkish stance recently. Real benchmark rates are already the highest in LatAm and will continue to be by year-end, in their view.
    • They prefer to fund bullish BRL positions with JPY given the superior carry-to-vol profile due to zero interest rates in Japan.
    • Risks to the trade include President Lula's approach to state intervention and Japan's potential intervention in FX markets.
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  • Bank of America have recently opened a long BRL/JPY trade, currently at 30.11, noting that the trade has a positive carry of 4.5% and expected return of 11.1%, with a Sharpe ratio of 1.
    • BofA say that from a valuation standpoint, BRL is cheap and should benefit from high real rate differentials and positive economic growth surprises. They believe that growth will continue surprising to the upside despite recent consensus forecast upgrades.
    • They note that positioning is also now more balanced after local funds cut their net long BRL futures positions in half.
    • The BCB has shifted its tone to a more hawkish stance recently. Real benchmark rates are already the highest in LatAm and will continue to be by year-end, in their view.
    • They prefer to fund bullish BRL positions with JPY given the superior carry-to-vol profile due to zero interest rates in Japan.
    • Risks to the trade include President Lula's approach to state intervention and Japan's potential intervention in FX markets.