Brazil Central Bank Resumes Rollover of Foreign-Exchange Swaps

  • Action to support the currency comes after two-day slide
  • Slump trimmed the currency’s gain from 2% to 0.3% this year

Brazil’s central bank is to resume its offerings of swap contracts intended to support the currency, citing current market conditions.

Policy makers said up to 12,000 swap contracts due Feb. 1 will be rolled over on Tuesday, according to a statement late Monday. The Central Bank had revived the program in November after Donald Trump’s victory in the U.S. presidential election spurred a drop in developing countries’ assets amid concern his policies could potentially curb trade and heighten volatility. It halted the auctions in mid-December.

The currency fell 0.7 percent on Monday to 3.2414 per U.S. dollar, in line with its emerging-market peers. The slide helped trim this year’s gains of as much as 2 percent up to Jan. 12 to to wispy 0.3 percent. Brazil’s real was the world’s best performing currency in 2016 as a change in government spurred optimism the country would undertake the necessary measures to cut the budget deficit and fuel the economic recovery.

"The dollar has been advancing consistently and is heading to a level that muddles the policy of cutting interest rates, "said Reginaldo Galhardo, a foreign-exchange manager at Treviso Corretora de Cambio in Sao Paulo. "The central bank noticed markets needed liquidity and decided to provide it to give support to the currency".

The central bank started the intervention program in August 2013 to limit volatility after the real neared a five-year low on indications the Fed was preparing to taper stimulus. It scaled the program back in March 2015, ending sales of new foreign-exchange swaps that had swelled the government’s liabilities, only to increase them again in August of that year. The monetary authority changed tack in March 2016, switching to reverse swap contracts -- equivalent to buying dollars in the futures market -- as the real soared amid prospects of a government change.

While the swaps don’t change the supply of physical dollars in Brazil, they support the real by meeting demand from investors who want to hedge against the risk of the decline in the Brazilian currency. They also boost onshore dollar loan rates, encouraging commercial banks to bring the U.S. currency into Brazil to profit from the higher rates onshore.

    Before it's here, it's on the Bloomberg Terminal.