Published Tuesday, 27 October, 12:45 p.m. ET · Source: Banco Central do Brasil (the central bank), B3 (Brazil’s stock exchange)
Key Facts
—The message. Central bank chief Gabriel Galípolo says it will step into the currency market only if trading breaks down.
—The backdrop. The dollar jumped more than 8% to about R$5.40 (Brazilian reais) on Monday, one of its largest gains since 1999.
—Tuesday. The dollar fell roughly 1% on Tuesday morning, to about R$5.35 per US$1.
—Still unknown. What counts as a breakdown, and what tools the bank would use.
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Brazil’s currency has just been through its worst day in 27 years, and the man who guards it is staying calm. Gabriel Galípolo, president of the Central Bank of Brazil, said on Tuesday that the bank will intervene only if the market stops working properly.
“When we see it, we will act,” Galípolo told reporters, adding that the bank acts “only in cases of dysfunction.” He gave no detail on what kind of emergency step the bank might take, and he spoke at the presentation of the bank’s twice-yearly Financial Stability Report, its review of risks to the banking system.
For readers abroad, the message is simple: the bank sees a violent move in the real as a market reaction, not yet a breakdown. A partial rebound on Tuesday morning gave it room to say so.
Sources: Banco Central do Brasil (Selic, Focus survey, PTAX), IBGE (IPCA), RT market data (market quotes). Checked Oct 27, 16:30 UTC.
How Bad Was Monday?
The dollar closed up more than 8% at about R$5.40 on 26 October, the day after President Luiz Inácio Lula da Silva won re-election. That is one of its largest one-day gains since the real began to float in 1999, from about R$4.99 at Friday’s close.
Investors had bet on Senator Flávio Bolsonaro, the conservative son of former president Jair Bolsonaro. When Lula won, the Ibovespa, Brazil’s main stock index, fell 13.88% to 176,608 points, and B3, Brazil’s stock exchange, halted trading for the first time since March 2020 under its circuit breaker, a rule that pauses trading after a 10% drop.
What Does Acting Only on Dysfunction Mean?
A weak currency alone is not enough for the bank to step in. Brazil lets the real float, so the bank steps in only when buyers and sellers cannot find each other at any price, which is what economists call a dysfunctional market.
The bank’s usual tool is the currency swap, a contract that gives investors protection against a rising dollar without the bank spending its reserves. On Tuesday morning at 11:30 a.m. Brasília time (10:30 a.m. ET) it held a swap auction of up to US$4 billion, scheduled in advance, to roll over contracts expiring on 3 November.
Live Market IntelligenceBrazil — Live Market Board
Rio Times · Live Market Intelligence
Brazil — Live Market Board
-0.37%
175,958.18
-0.37%
69,470.99
-0.58%
10,697.16
+1.15%
2,848,945
—
2,506.20
+0.05%
| Instrument | Last | Change | YoY | Prev. | High | Low | Volume |
|---|---|---|---|---|---|---|---|
| IBOV | 175,958.18 | -0.37% | +19.85% | 176,608.23 | 178,526 | 175,157 | — |
| USD/BRL | 5.34 | -1.30% | -0.80% | 5.42 | 5.42 | 5.30 | — |
| SELIC | 13.75% | — | — | — | — | — | |
| PETR4 | 53.27 | -1.13% | +77.43% | 53.88 | 53.70 | 52.83 | 36,899,000 |
| VALE3 | 63.05 | -2.07% | +2.24% | 64.38 | 64.43 | 62.80 | 21,241,400 |
| ITUB4 | 41.50 | -0.48% | +11.27% | 41.70 | 42.60 | 41.15 | 25,549,200 |
| BBDC4 | 15.85 | -0.63% | -13.17% | 15.95 | 16.30 | 15.74 | 59,703,700 |
| BBAS3 | 17.73 | +1.49% | -15.30% | 17.47 | 18.31 | 17.51 | 62,345,600 |
| B3SA3 | 15.43 | +2.39% | +23.14% | 15.07 | 15.78 | 15.20 | 67,604,600 |
| ABEV3 | 15.45 | +0.52% | +27.00% | 15.37 | 15.68 | 15.31 | 24,075,100 |
| WEGE3 | 45.92 | +3.12% | +9.96% | 44.53 | 47.08 | 45.06 | 8,915,500 |
| PRIO3 | 69.61 | -2.15% | +87.73% | 71.14 | 70.98 | 69.15 | 5,934,500 |
| SUZB3 | 47.21 | -0.40% | -3.87% | 47.40 | 47.83 | 46.10 | 6,438,300 |
| RENT3 | 31.13 | -1.71% | -20.88% | 31.67 | 32.68 | 31.02 | 17,887,400 |
| AZZA3 | 17.11 | +3.51% | -40.40% | 16.53 | 17.42 | 16.72 | 4,268,700 |
| CSNA3 | 4.84 | -3.39% | -45.96% | 5.01 | 5.14 | 4.84 | 12,415,100 |
| GGBR4 | 24.82 | -2.48% | +36.22% | 25.45 | 26.20 | 24.81 | 6,606,400 |
| ENEV3 | 26.78 | +0.41% | +49.78% | 26.67 | 27.35 | 26.30 | 11,039,700 |
Why Is the Dollar Falling Back?
After a drop that big, many traders took profits. The dollar was trading about 1% lower on Tuesday morning, near R$5.35, after an 8% surge the day before.
Galípolo’s calm tone matters here. A central bank that does not panic can stop a rebound from turning into a second wave of selling.
What It Means for US Readers
Investors in the United States who hold Brazilian stocks, bonds or funds priced in reais lost on both the shares and the currency on Monday. The central bank is signalling that it will not defend a particular level, so the real will keep moving with the news on the government’s budget plans, as described in our guide to Brazil’s economy.
Travellers and expats paid in dollars now get about 7% more reais per dollar than before the election. That bargain lasts only as long as the real stays weak.
What Is Not Known
The bank has not said what level of volatility would count as a breakdown, or whether it would sell dollars directly or use swaps. Markets will also look to the next meeting of the bank’s rate committee, Copom, for hints about interest rates.
Our earlier reports cover Monday’s market close and forecasts for the real.
Sources
Banco Central do Brasil, Financial Stability Report · B3, Ibovespa data
This article was produced by The Rio Times’ automated newsroom system. How we use AI · Report an error · Editorial responsibility: Matthias Camenzind, Editor-in-Chief
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Frequently Asked Questions
Will Brazil’s central bank defend the real?
Only in a crisis. Galípolo said the bank acts “only in cases of dysfunction” and did not set a level for the dollar.
How big was the dollar’s jump after Lula’s win?
The dollar rose more than 8% to about R$5.40 on 26 October, one of its largest daily gains since the real began to float in 1999.