Why is Brazil going to auction US$1 billion? Understand the reason why the dollar soared

O dollar opened lower this Tuesday (2) after the central bank announce that it will do aintervention in the foreign exchange marketin an additional auction of up to 20 thousand contracts for currency swap, the equivalent of US$ 1 billion. At 9:34 am (Brasília time) the currency was quoted at R$5.04. On Monday (1st) the currency reached R$5.06, highest price in 5 months.

The contracts announced by the monetary authority are equivalent to the sale of dollars in the futures marketwhich works with the purchase of a good or asset with a future maturity date and for a pre-fixed value.

But why did the dollar rise again?

The reason for more a rise in the dollar was the disclosure of purchasing managers index (PMI) of US industry. After more than 12 consecutive months of decline, the index advanced, going from 47.8 points in February to 50.1. Market agents expected the number to increase to 48.4 points.

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This means that industrial activity is strong and signaling progress. The indicator is a kind of ‘x-ray’ of the resilience of North American economic activity. As a result, optimism may delay the start of the energy cutting cycle. interest rate from the country.

With higher interest rates abroad, the tendency is for investors to allocate their resources to the United States. As a result, there should be less flow of resources to Brazil, leading to a dollar appreciation.

Can the Central Bank intervene in the exchange rate?

A intervention in the foreign exchange market was announced to try to contain the appreciation of the currency in the country and this is the BC’s first intervention in the current Lula government. In 2023, the BC did not put new money on the market, it only promoted currency swaps It is line scrollingwhich is an investment maneuver used by traders and investors to extend their positions in existing options.

The contracts for exchange rate swapl, the Central Bank carries out an operation that corresponds to a sale of dollars in the futures market, ensuring that there is supply to meet the increased demand for the currency, which values ​​the currency. The BC uses the mechanism to curb volatilities that are considered disproportionate.

In a note, the BC informed that “the additional auction of traditional foreign exchange swaps (aims at) maintaining the regular functioning of the foreign exchange market, in view of the demand for foreign exchange instruments resulting from the effects of the redemption of NTN-A3 (National Treasury Note, subseries A3, which does not have been negotiated) on 4/15/2024.”