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Some Options Traders Betting on Upside for Brazil ETF


The iShares MSCI Brazil Capped ETF (EWZ) is trading higher by nearly 2% Monday, the first trading day after the conclusion of the 2014 World Cup, hosted by Brazil.

Monday is also the first trading day since Brazil’s loss to the Netherlands in Saturday’s third-place game, making EWZ’s 2% pop arguably more impressive. On a related note, EWZ is now 3.4% since last Tuesday when Brazil was drubbed by eventual champion Germany 7-1 in the semifinals in what was one of the biggest blowouts in World Cup history. [Brazil Loses, but ETFs Win]

Football futility is not scaring some traders away from EWZ, the largest ETF tracking Latin America’s largest economy. In fact, the options market says some traders are betting on further upside for EWZ.

“EWZ which recently took a breather from an impressive quarterly rally that began in mid -March, is gapping higher today, up>1% in the early going. We saw interest in upside September 50 calls on Friday and EWZ has not seen $50 since October of last year,” said Street One Financial Paul Weisbruch in a note out this morning.

While EWZ has not traded above $50 since October 2013, it has been 14 months since the ETF traded above $55. The ETF lost 17.5% last year and was one of the 10 worst funds in terms of 2013 outflows.

Speaking of flows, EWZ has taken in just $21.6 million in new assets this year despite entering Monday with a 13% year-to-date gain. By comparison, the iShares MSCI Mexico Capped ETF (EWW) has added nearly $163 million in new assets despite gaining just 4.5%. [Investors Prefer Mexico to Brazil]

With the World Cup over, investors will be focusing on Brazilian politics. The country holds national elections in October and EWZ has already shown a positive correlation to negative poll numbers for incumbent President Dilma Rousseff.

Some analysts have gone so far as to say Brazi’s embarrassing defeat in the World Cup could have consequences for Rousseff and that may be the reason EWZ has performed well in the wake of two consecutive defeats for Brazil to end the World Cup.

Market observers believe Brazil’s central bank will begin lowering interest rates if Rousseff loses her reelection bid. Credit Suisse’s CSHG Verde FIC FIM, the biggest Brazilian hedge fund, believes rate cuts there could take place in the near-term, Reuters reported.

Brazil’s central bank boosted rates nine times from the second quarter of 2013 to April 2014. The WisdomTree Brazilian Real Strategy Fund (BZF) is up 13.6% this year.

iShares MSCI Brazil Capped ETF