BLUE LINE = BRLUSD

The market began at the lows and ended near the highs with high volatility and volume amidst option expiration and outright liquidation of Z and the rolling of Z into forwards. This activity resulted in 22.15c range with a net change of 16.70c higher with a sharp drop in the Z OI, in the total OI and in the Delta OI but with an increase in the H OI. EFP activity increased as expected in FND season and with unusually high EFS postings. As a result, the ZH traded higher with a high OI remaining indicating that traders were caught short. Eventually the spread traded Z premium.

Activity is clouded by the Z liquidation as a result of notice season activity and option expiration. On the surface it seems that commercials and large and small traders sold while Funds and swap dealers bought. Considerable liquidation took place both in futures and options spreads. Although the COT may be difficult to read this week, the behavior of the market continues to provide patterns.

Prices tend to consolidate in the vicinity of the handles, 200.00, 210.00, 220.00 etc., before they take off. After trading below 230.00 this week prices traded on either side of this price for the days following the COT report. Yesterday, for those traders that recognized the concentration of activity around 230.00, I did but hope for lower prices got in the way, capitalized as the market came close to touching 240.00. Then this high price appealed to long liquidators it seemed and prices dropped sharply lower, possibly aided by the weak Real which ended at 5.6135 +0.0559 (+1.00%) in USDBRL.

Spreads have been interesting. After options expired, including CSOs, the ZH traded much higher with a remaining high Z OI as mentioned. Outright prices rallied simultaneously. The reason for this behavior could be a number of factors. Calls were high both in Z and ZH and possibly market makers got caught short both. Whoever was on the short side the spread moved higher without much commercial willingness to roll their inventory, even at premium prices. The remaining spreads are also worth watching. The HK continues to touch the Even level as a result of buying of H outright, buying of the spread by those anticipating a performance equal to ZH and because of forward selling probably by origin as the Real weakens and the Selic remains elevated. However, the H OI is now 137K+ after Thursday’s activity with specs on the long side. There is plenty of time until H option expiration and rolling period so anything can still happen. KN and NU are at a premium but there is a trade entity, I believe, that has bought and continues to buy thousands of out of the money NZ puts. This trader is also looking at KU puts.

The market continues to be strong but opportunities are present on the short side as well. In RC, the arbitrage keeps widening while the market lags KC. Yet the spreads remain at a premium.