RIO DE JANEIRO, BRAZIL – After auctioning US$34.4 billion of international reserves in recent months, the Central Bank (BC) will sell an additional US$7.5 billion in the spot market in December. The announcement was made yesterday, November 28th, by the monetary authority after the markets closed.
With no impact on the exchange rate, these auctions are unrelated to the interventions that the Central Bank has made this week to contain the dollar’s hike.
The direct sale of dollars from reserves represents a new model of foreign exchange intervention with repercussions on fiscal policy, by reducing interest rates on public debt and contributing to restrain the government’s indebtedness at times of high dollar.
The money will be used to rollover (renew) traditional currency swap contracts (selling dollars in the futures market) that expire in February. One of the country’s main instruments against external economic impacts, international reserves currently stand at US$370.1 billion.
In late August, when the government adopted the new policy, reserves stood at US$388 billion.
Ordinary buyers cannot buy dollars from international reserves. This type of operation is restricted to dealers – large banks and brokers authorized by the Central Bank to meet the demand for dollars by large companies and other financial institutions.
New model
Up to late August, when the US currency was on the rise, the monetary authority auctioned traditional currency swap contracts, which were equivalent to selling dollars on the futures market. These operations, carried out in Brazilian Reais, do not affect international reserves, but have an impact on the Central Bank’s foreign exchange position and increase interest rates on public debt.
Now, the Central Bank acts differently. It will sell dollars in the spot market and, concurrently, it will buy the same amount in reverse exchange swap contracts, which work as a purchase of currency in the futures market.
If the demand for spot dollars drops below this value, the monetary authority will complete the operation with traditional swap contracts.
In justifying the measure, the Central Bank explained that traditional currency swaps are demanded by investors who want to protect themselves from exchange rate volatility, but that part of the market is demanding spot dollars as a result of the economic situation.
The new policy impacts the fiscal situation because by selling fewer traditional swaps and more dollars from foreign reserves, the government pays less interest on federal public debt.
Yesterday, the commercial dollar closed the day sold at R$4.216, down one percent. After breaking records in recent days, amid political tensions in Brazil and other Latin American countries and the trade war between the United States and China, the US currency halted its rise yesterday, easing the pressure on the financial market.
Source: Agência Brasil