Implied volatility as indicated by option pricing on the iShares MSCI Brazil Capped (EWZ – 43.78) dipped under 30.00 on Friday as the underlying ETF rose over 4%. The gain in EWZ was based on the Banco Central Do Brasil (Central Bank of Brazil) taking action to support the Brazilian real. The real has been under pressure, along with all emerging market currencies this year, and was trading at 2008 lows this past week. The support of the real is going to be continuous throughout the end of 2013 (ongoing central bank support of a market – nothing new in this day and age). Also, as a side note – George Soros has yet to indicate if he will be taking the other side of this action or not.
The CBOE Brazil ETF Volatility Index (VXEWZ – 29.01) dropped just over a point on the week after approaching 33.00 on Wednesday. The curve shift shows that the futures market was anticipating a drop in VXEWZ into the end of the year. The futures rose on the week despite the drop in the index – it may be that the futures players were actually disappointed at the market’s reaction to the central bank announcement. The curve remains inverted for the moment, it will be interesting to see if a return to normalcy can be result from a stronger real.
The iShares MSCI Emerging Markets ETF (EEM – 38.65) was actually down on the week losing 1.65%. This was despite the gain in EWZ. The culprit appears to be Chinese stocks which were under pressure last week as well. Despite a drop in EEM, VXEEM was down as well. This could be another case of developed market volatility (think VIX) influencing emerging market volatility. There has been a lot of that going on this year due to the divergence of emerging market performance versus developed equity market performance.