Brazil Real Drops After $5.25 Billion Central Bank Intervention

Updated on
  • Central bank auctions foreign-exchange reverse swaps
  • Bank intervenes as Brazil's real best-performing EM currency

Brazil’s real fell from an almost eight-month high as the central bank stepped up efforts to weaken the currency after Brazilian assets rallied on renewed speculation that impeachment of President Dilma Rousseff is drawing closer.

The central bank announced it would auction 105,000 foreign-exchange reverse swaps Wednesday, a move that’s equivalent to buying $5.25 billion in the futures market, a day after selling a record $8 billion of the contracts. It sold all the contracts offered in five different auctions on Wednesday. Brazil’s currency, the most volatile in emerging markets, fell 0.3 percent to 3.4983 per dollar, after earlier advancing as much as 0.5 percent.

The central bank is intervening to cool gains in the currency as traders bet that an impeachment of Rousseff will lead to a new government that could curb a record fiscal deficit and help boost business confidence. The real was the world’s biggest gainer in the first quarter after tumbling last year as Brazil lost its coveted investment-grade status and a sweeping corruption scandal hit businesses and the government.

"Brazil’s real has not strengthened more only due to the intervention by the central bank," said Leonardo Monoli, a partner at Jive Asset Gestao de Recursos in Sao Paulo.

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 leader of the lower house, Eduardo Cunha, told reporters in Brasilia on Tuesday.

Tuesday’s record intervention by Brazil’s central bank couldn’t keep the real from climbing to the highest level since August amid bets that president Rousseff will be impeached. The total outstanding position of swap contracts in Brazil’s market was $101 billion as of April 11, according to central bank data compiled by Bloomberg.

"Traders are unwinding hedge positions due to the impeachment trade," said Italo Abucater, the head of currency trading at ICAP Brasil Ctvm in Sao Paulo. "Meanwhile, the central bank is seizing the opportunity to manage its swaps position."

The central bank sold 160,000 reverse swaps in five different auctions Tuesday. It was the biggest sale on a single day since the contracts were sold for the first time in 2005. The program was re-introduced last month after three years of efforts to bolster the currency.

The central bank has reversed course as the real climbed 13 percent this year, leading global gains in emerging markets. While a stronger currency can help suppress inflation, it also threatens to make Brazilian exports less competitive by making them more expensive in dollar terms.

"Yesterday’s intervention was an attempt to unwind some of the real buying and caution that further strength of Brazilian currency may not be desired," said Marc Chandler, global head of currency strategy in New York at Brown Brothers Harriman & Co.

Brazil posted a foreign exchange inflow of $1.5 billion in the week through April 8, compared with a $371 million inflow the previous week, according to data from the central bank released Wednesday. The outflow so far this year has been $8.5 billion, compared with an inflow of $5.4 billion in the same period last year.

The cost of insuring Brazilian bonds in the credit-default swaps market for five years declined 17.2 basis points to 343.5 basis points, the lowest level since Aug. 28. Swap rates on the contract maturing in January 2017, a gauge of expectations for interest rates, dropped 0.10 percentage point to 13.65 percent.