Brazil’s Central Bank President Ilan Goldfajn announced last night (Jun. 7) a greater intervention in the foreign exchange market to curb the dollar—which closed out trading up 2.3%, the highest level in the Brazilian currency since March 1, 2016. Extra swap contract auctions will be held by the end of next week adding up to $20 billion.
Goldfajn argued that the depreciation of the real comes as a result of the “more difficult” external scenario, in which the increase in US interest reverts the capital flow from emerging economies to advanced countries. He guaranteed that the efforts of the Central Bank will be spearheaded by the National Treasury in order to promote market liquidity. “The Central Bank and the Brazilian Treasury will continue offering ongoing liquidity, in coordinated fashion—be it for the foreign exchange market, be it in the interest market, whenever necessary,” he stated.
By carrying out swap operations, the Central Bank sells contracts for the sale of the US currency without actually transferring the funds. When the contract is over, the bank covers how much the dollar floated for the investor, who in turn returns the variation in interest for the period. If the interest is higher, the investor covers the proceedings. If the currency grows more than the interest, the Central Bank is the benefited party. This contract makes investors less interest in the US currency, which thus has its value against the real lowered.
The president of the Central Bank did not rule out the adoption of other intervention measures. “We have no prejudice against any instrument. I’m referring to swaps, reserves [adding up to $380 billion], and selloffs. Up to now, we’ve only seen the need for swaps.”
Goldfajn argued for Brazil’s floating exchange regime, and noted that the monetary policy is separated from the exchange policy, and that the Central Bank will not use the benchmark interest rate to interfere with foreign exchange, but rather just to curb the inflation.
The head of the Brazilian Central Bank also highlighted the “solid foundations” of the Brazilian economy, like the low deficit in payments (0.4%), and the flow of foreign direct investment in the country (3.4% of the gross domestic product). “Another key foundation is that we’ve had a low current inflation, lower than the target for the last 12 months,” he added.