Dollar goes to R$5.06; BC makes first intervention under Lula – 04/01/2024 – Market

After the dollar closed at R$5.06, the Central Bank announced on Monday night (1st) its first intervention in the exchange rate since the beginning of President Luiz Inácio Lula da Silva’s (PT) third term.

The action will take place through an additional auction of up to 20,000 currency swap contracts, equivalent to US$1 billion. The BC’s objective is to provide protection against excessive variations in the dollar in relation to the real (exchange rate hedge) and liquidity to the domestic market.

In a note, the BC said that it will act “with a view to maintaining the regular functioning of the foreign exchange market” in view of the effects generated by the redemption of the NTN-A3 title (National Treasury Note, subseries A3), scheduled for the 15th of April.

The purchase of a swap contract by the monetary authority works as an injection of dollars into the futures market and whoever buys it is protected in the event of a devaluation of the real.

It is an instrument used by the Central Bank to avoid dysfunction in the foreign exchange market, ensuring that there is supply to meet an increase in demand for foreign currency.

The exchange rate swap auction is a way for the monetary authority to give investors an exit, as if opening an alternative door at a crowded party, economists say.

The contracts offered by the BC have two maturities: January 2, 2025 and April 1, 2025. In current values, NTN-A3 securities are equivalent to around US$3.7 billion.

“A maximum of up to 20 thousand contracts will be accepted to be distributed at the discretion of the Central Bank of Brazil, between the aforementioned maturities”, says the monetary authority.

The BC will accept proposals from financial institutions (limited to five per institution) between 12:30 pm and 12:40 pm, and the result of the public offer will be announced after the investigation carried out by the municipality.

After the results are announced, the monetary authority will send B3 a list of the institutions covered, the number of contracts accepted for each one and the interest rate determined in the auction.

Earlier, between 11:30 am and 11:40 am, the BC will hold the traditional auction of up to 16 thousand contracts —equivalent to US$800 million— in rolling instruments existing on the market.

This Monday (1st), the dollar rose 0.88% and ended the session at R$5.058, following the strong rise in American Treasury bonds, the so-called “Treasuries”, on the day of adjustments after the Easter holiday.

The market was also impacted by the low liquidity of the session on a holiday in Europe. On the Brazilian stock exchange, Ibovespa —the country’s main stock index— fell 0.87%, closing the session at 126,990 points. In the year, the indicator accumulates a drop of 4.53%.

In 2023, the BC did not hold extra dollar auctions in a scenario of low real volatility and strong trade flow — which marked the smallest intervention by the monetary authority since the adoption of the floating exchange rate regime in the country in 1999.

In projections for this year, economists consider that exchange rate volatility in Brazil will depend on the conduct of the Fed’s (Federal Reserve, central bank of the United States) interest rate policy and geopolitical risks on the global stage.

In the domestic environment, the trajectory of public accounts is the main concern of economists.

On December 28, 2023, the American currency closed at R$4.85. Since then, it has been on an upward trajectory. Year-to-date, it rose 4.25%. This Monday, the dollar ended the day at R$5.06 — the highest price of the year.

The last interventions were made in 2022. In April of that year, the BC sold US$500 million in an extraordinary auction of 10,000 traditional currency swap contracts.

All contracts offered were sold, with 3,250 expiring on December 1, 2022 and 6,750 due on April 3, 2023. There was also an additional auction in May.

At the time, the dollar remained at high levels, among other reasons, because of the prospect of a more aggressive interest rate increase by the Fed.