Brazil FX volatility too high, cenbank lacks tools to tackle short-term bursts - director

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By Jamie McGeever

BRASILIA, July 24 (Reuters) - Brazilian foreign exchange market volatility is higher than the central bank would like, monetary policy director Bruno Serra said on Friday, adding that the bank does not have the tools to sufficiently suppress short-term bursts of volatility.

Speaking in a live online debate hosted by XP Investimentos, Serra noted that the real has no longer been on a one-way path lower and that the central bank has more than adequate FX reserves, but warned that volatility remains uncomfortably high.

"FX volatility is a little higher than we would like. It is something makes us uncomfortable and something we need to understand," Serra said.

"Our instruments are not made for the volatility we have seen recently, intraday or from one day to the next, where we have seen larger than expected swings in the FX rate," he added.

Brazil's real slumped to a record low near 6.00 per dollar in May, prompting the central bank to intervene selling dollars to manage the slide. It has since recovered closer to 5.00 per dollar, but volatility has not fallen commensurately.

One-month implied options volatility is around 20%, down from around 30% at the height of the real's sell-off in March, but still well above pre-crisis levels of 10% in February.

Three-month implied volatility has fallen even less. It is currently around 19%, close to the peak of 22% and also well above pre-crisis levels of around 10%.

The central bank lacks the tools to tackle volatility through intervention in the options market, Serra said, noting that other central banks that have done so have had mixed results.

Serra said he has sympathy for the view that historically narrow interest rate differentials could be fueling FX volatility, but said he was not fully convinced.

Similarly, the proliferation of quantitative funds using algorithm trading strategies and individual traders has coincided with the rise in volatility, but he could say for sure if there is direct causality.

"There's no reason why the real's structural volatility should be much different from others (FX rates) and other Brazilian assets," Serra said. (Reporting by Jamie McGeever and Marcela Ayres, Editing by Franklin Paul and Richard Chang) ((jamie.mcgeever@thomsonreuters.com; +55 (0)11 97189 3169; Reuters Messaging: jamie.mcgeever.reuters.com@reuters.net)) Keywords: BRAZIL ECONOMY/CENBANK (UPDATE 1)

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