World Cup set to "shut down" LatAm markets

The start of the World Cup in Brazil on June 12 will lead to a slump in liquidity in Latin American currencies, most notably USD/BRL, as traders and major market infrastructures prepare to switch their focus from trading to football. 

The BM&F Bovespa exchange, which handles the overwhelming majority of the Brazilian futures market, has announced it will be closed on the opening day of the tournament and operate reduced hours on those days when Team Brazil takes to the pitch. This will severely restrict available liquidity, market traders say.

USD/BRL, which often suffers serious liquidity shortfalls during US holidays due to reduced trading hours in New York, relies heavily on the local Brazilian market and is therefore likely to see a lack of trading during the tournament when the BM&F Bovespa exchange reduces its hours.

"In Brazil, 95% of daily volumes in foreign exchange products is done on the futures market, which is transacted through BM&F Bovespa. If that is closed, there will be no liquidity. People might trade $500 million in an entire day in the spot market, but you can expect very low liquidity, even when the market is open," says an FX trader at a European bank based in Sao Paulo.

The USD/BRL market makes up about 75% of the South American market and is closely correlated with other currency pairs in the region such as USD/MXN. As a result, one head of FX trading at a major buy-side firm in New York says other Latin American currencies could see liquidity drop by as much as 50%, as countries such as Argentina, Mexico, Uruguay, Chile, Columbia, Ecuador and Brazil gear up to play in the World Cup, which will run until July 13.

"The market has come very close to a halt. Brazil is officially closed every day the national team plays, while Mexico and Chile are not far behind. I think liquidity could drop by at least a half. All of the major market headlines are out of the way this week as well, so I think it could be time to get a good book or a pillow if you are not following the football," says one buy-side trader in New York.

The liquidity shortfall could be of concern to some fund managers if volatility picks up in Latam currency pairs. In June 2013, there was a big rush to exit emerging market positions following former Fed chairman Ben Bernanke's speech at a Federal Open Market Committee meeting in May, in which he alluded to the possibility of the Fed tapering its asset-purchasing programme.

"The volatility question is a bit more conflicted as I could see it moving in either direction, unlike market liquidity. During a time when liquidity is lower, a surprise from the Fed or political problems in Ukraine could result in some big moves, and a spike in volatility," says the trader.

BM&F Bovespa's latest rhetoric has been to steady the movement of USD/BRL, says one head of FX emerging markets trading at a bank in London, so the chances of any big moves are particularly unlikely, while he also stresses the impact on other markets could be just as profound as traders turn their attention to football.

"For England games at previous World Cups, we've had to put TVs on the trading floors – otherwise no one would have been at work! I don't think the market needs much of an excuse for a distraction at the moment. The central bank of Brazil reduced the amount of intervention it was doing when USD/BRL hit 2.20. Equally, when 2.28–2.29 was hit this week, the central bank said it didn't want it going up either. If the central bank is telling you to calm down and the national obsession that is football is around the corner, then it's unlikely a lot is going to happen," he says.