Measure of Exchange Rate Uncertainty Through October Rises to Highest in 3½ Years

A measure of uncertainty about the direction of the exchange rate between now and October jumped this Thursday (28) to the highest level in three and a half years, with an unstoppable rally of the US dollar abroad to maximums in two decades, but also a reflection of the nebulous scenario in Brazil until the presidential elections.

Implied volatility on six-month dollar/real option contracts rose to 20.408%, the highest since September 26, 2018 (20.638%). Thus, it left behind the maximum of the pandemic, of 20.175%, of June 29, 2020.

The higher the number, the more sudden fluctuations are expected for the price of an asset – in this case, the exchange rate.

The sharp rise in implied volatility, however, is most noticeable in the six-month maturity, which includes October, the month of presidential elections. Measures for one, two and three months operated on a slight decline or around stability on Thursday.

The dollar rose again against the real in this session and came close to R$5.05, maximum since mid-March, before giving back part of the gains and being quoted around R$4.99 around 1:06 pm ( from Brasilia).

Abroad, an index of the US currency against a basket of rich-country rivals has surged to peaks since December 2002, on expectations that the Fed’s monetary policy will remain comparatively more aggressive.

Here, the dollar was quoted around R$4.60 about a week ago and, although analysts were surprised by the speed of the rally to above R$5, they recalled that the currency was expected to return to around this level, in part due to the prospect that the electoral debate will become more heated as we move into October.