(Bloomberg) -- The lowest volatility in a decade already has locals piling into bets on the Brazilian real. Foreigners should come next.

The currency, which saw wild swings for most of the past decade as constant political turmoil rippled through markets and the economy, has been stuck between 4.84 and 5 per dollar since mid-2023. The odd calm — a result of relative political stability and still-high interest rates — is paving the way for the real to become one of the main destinations for emerging-market investors. 

The one-month implied volatility on Brazilian real options has dipped to 9.2%, the lowest since 2014. The measure is one of the main gauges for traders to decide whether to borrow in lower-yielding currencies to buy those that offer higher yields, the so-called carry trade.

The fresh low in volatility should make the real pop up on foreigners’ radar. Brazilian hedge funds, in the meantime, have been adding to their long real positions for months, pushing holdings to a record high, according to data from exchange operator B3.

The real is down 1.5% so far this year, in line with emerging-market peers battered by the dollar’s strength. It traded at 4.93 per dollar on Tuesday. 

While the central bank has been cutting rates, traders are convinced that policymakers won’t accelerate the pace and even if they do, real rates will remain high. 

The so-called Selic benchmark rate stands at 11.25% and markets bet it will fall to 9.5% by the end of the cycle, while inflation is forecast to ease to 3.9% by the end of the year, according to a Bloomberg survey. Price pressures are expected to stay low, with the inflation breakeven rate implied on three-year bonds at 4.44%, near a three-year low. 

Bank of America strategists earlier this month recommended buying the real and selling the Mexican peso on diverging monetary cycles. They say Mexico policymakers may cut rates before the Federal Reserve, which will weigh on the peso, while the real should benefit from disinflation that will keep real rates high. 

“The Brazilian real is the quintessential high carry currency that performs well when it delivers investors a positive real carry in addition to low and stable inflation,” strategists Ezequiel Aguirre and Christian Gonzalez wrote. 

The real is also seen as a better option for carry traders than the peso because political noise is expected to be lower. Mexico will hold presidential elections in June and the economy is highly vulnerable to the US vote later this year. 

“Even though Brazil’s central bank will continue to cut faster than Banxico and the Mexican currency offers higher liquidity, the volatility front may favor the real due to underlying risks tied to presidential election both in Mexico and in US,” said Alejandro Cuadrado, global head of FX & Latin America strategy at BBVA. The real is the bank’s top pick in the region. 

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