Brazil Auctions $1 Billion in Reverse Currency Swaps

Brazil’s central bank auctioned reverse currency swaps worth $1 billion as it buys dollars in the futures market for the first time in 21 months to protect the real from the global currency war.

The central bank, in a statement on its Sisbacen system, said it placed all 20,000 contracts offered in the auction, with maturities between April and January 2012. Reverse swaps pay investors the overnight interbank rate in reais, currently 10.75 percent, in exchange for a fixed interest rate in dollars.

Today’s auction is the third time in two weeks Brazil has taken steps to curb a rally in the real, which has strengthened 37 percent against the U.S. dollar since the start of 2009. Finance Minister Guido Mantega last week said he’s ready to take additional currency measures as the U.S. seeks to “melt” the dollar through near-zero interest rates and the Federal Reserve’s purchase of $600 billion in Treasuries.

The real weakened for the first time in four days and dropped as much as 1 percent earlier today. After the bank said it placed all of the contracts on offer, the real pared earlier losses. The currency fell 0.7 percent to 1.6844 per U.S. dollar at 1:41 p.m. New York time.

“The government has committed itself to avoid the real strengthening beyond 1.65,” Luciano Rostagno, chief strategist at CM Capital Markets Ltda., said in a phone interview from Sao Paulo. “The impact the reverse swaps will have on the currency will depend on how intensely they are used. More auctions are likely to be carried out.”


Central banks in Latin America are “overburdened” by capital inflows that reached $203 billion last year and that may be “destabilizing” exchange rates, the World Bank said in a Jan. 12 report. The inflows, a driving force behind the 5.7 percent economic expansion in the region last year, are a risk to the global recovery and may do “lasting damages” to some nations, the Washington-based bank said.

“It’s not fun anymore,” said Alejandro Urbina, an emerging-market debt manager in Chicago at Silva Capital, which helps oversee $800 million in assets. “The ongoing commitment by the government to currency intervention limits our interest in the real.”

Finance Minister Guido Mantega said the government’s strategy is to “neutralize” traders’ attempts to strengthen the real.

Mantega’s Role

“The finance minister seems to be behind all these measures,” including the central bank’s decision to sell reverse swaps, said Rogerio Freitas, a partner at Rio de Janeiro-based hedge fund Teorica Investimentos.

“This is the highest-caliber weapon used so far,” Diego Donadio, strategist for Latin America at BNP Paribas, said in a phone interview from Sao Paulo after the auction was announced yesterday. “With the swap, the capacity to strengthen the dollar increases.”

The real may weaken “fast” to 1.75 per U.S. dollar as policy makers enter the futures market, Donadio wrote in an e-mailed report yesterday.

Foreigners poured a record $62 billion into Brazilian debt and stocks in the first 11 months of last year, up from $46 billion in 2009, according to the central bank.

Earlier Measures

The central bank announced last week a reserve requirement on short dollar positions in bid to reduce bets against the dollar to $10 billion from $17 billion in December. Mantega also last week authorized the country’s sovereign wealth fund to buy dollars in the futures market.

The central bank bought $41 billion in the foreign-exchange market last year, up from $24 billion in 2009. Last week it bought $1.34 billion. In October, Rousseff’s predecessor, Luiz Inacio Lula da Silva, tripled a tax on foreign investors’ purchases of fixed-income assets to 6 percent.

Mantega, who has stayed on as finance chief in the Rousseff administration, said this week the government wouldn’t lose money by selling reverse swaps because he was “sure the real won’t strengthen.”

The central bank today said the contract maturing in April had a fixed-dollar linear rate of 1.856 percent. The July contract had a fixed rate of 1.686 percent, while the January 2012 one had a rate of 1.860 percent.

The bank last auctioned reverse swaps in May 2009 to settle positions taken during the global financial crisis to curb losses by the real.

“If the dollar doesn’t strengthen, Brazil may increase the dosage,” Donadio said. “There will be questions about whether the real is still a floating currency should they step up efforts.”

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