Brazil $8 Billion Intervention No Match for Impeachment Joy

  • Central bank sold 160,000 contracts in five auctions Tuesday
  • Traders push up value of currency amid impeachment wagers

A record $8 billion intervention by Brazil’s central bank couldn’t keep the real from climbing to the highest level since August amid bets that president Dilma Rousseff will be impeached.

The central bank sold 160,000 foreign-exchange reverse swaps in five different auctions Tuesday, moves that are equivalent to buying dollars in the futures market. It was the biggest sale on a single day since the contracts, which tend to weaken the real, were sold for the first time in 2005. The program was re-introduced last month after three years of efforts to support the currency.

QuickTake Brazil's Highs and Lows

The central bank has reversed course as the real climbed 14 percent this year to 3.4889 per dollar on Tuesday, leading global gains, on wagers that a change in government will pave the way for reviving an anemic economy. While a stronger currency have goes hand-in-hand with economic growth and can help suppress inflation, it also threatens to make Brazilian exports less competitive by making them more expensive in dollar terms.

“The central bank is making clear that it does not want to see the currency trading below 3.50 per dollar, and it’s using all the artillery available for that,” said Jefferson Rugik, a currency trader at brokerage Correparti Corretora de Cambio in Curitiba, Brazil. “The market is optimistic with the impeachment possibility, and is testing the central bank to see how long it will keep with the reverse swap auctions. We should see more of this fight in the upcoming sessions."

The real advanced 0.1 percent Tuesday to its strongest level since Aug. 20, after declining as much as 2 percent earlier in the day.

A committee of Brazil’s lower house voted late Monday to recommend impeachment move forward, and a floor vote is expected to be concluded by 9 p.m. local time on Sunday, the chamber’s Chief Eduardo Cunha told reporters in Brasilia on Tuesday.

The total outstanding position of swap contracts in Brazil’s market was $100.7 billion as of April 11, according to central bank data compiled by Bloomberg. It might fall below $100 billion for the first time since Oct. 2014 after the auctions on Tuesday, according to Roberto Padovani, an economist at Banco Votorantim in Sao Paulo. 

The currency’s strengthening trend is opening up room for the central bank to trim its positions in swaps, he said. The real has climbed 14 percent this year, the best performance in emerging markets.

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