Dilma Rousseff has taken measures to stop the appreciation of the real. The Brazilian Central Bank swapped all of the currency futures contracts in a reverse swap auction. This way the institution headed by Alexandre Tombini disembarks in the futures market.
This is a last effort by the Brazilian government to weaken the real in order to protect exporters. The bank sold a total of 20, 000 contracts for a reported 988 million dollars in the first auction of its kind since May 2009. “Entering the futures market is a sign that in this currency war, [the government] will not allow the currency to go above 1.65 (real per dollar)” said Luiz Eduardo Portella of Banco Modal. “I believe this will change things short term, the real will go up to 1.75, 1.80 (real per dollar)” he added.
“I’m not sure we’ll see reverse currency swaps every day like we did in the past, but it seems like the Central Bank could act now with a certain frequency in the futures market” said Flavio Serrano, Senior Economist for the Brasil do Espiritu Santo Investment Bank in Sao Paulo. The strength of the real has been weighing on the industry even as the Brazilian economy advances. The Brazilian currency has gone up 4.6% against the dollar in the past year, after the 36% rise in 2009.
“When one enters into the reverse currency swaps market (…) that neutralizes sales and prevents the real from getting stronger” said the Finance Minister, Guido Mantega, earlier today. The Central Bank has already imposed a reserve requisite on the short term dollar positions in banks, as well as buying dollars on a daily basis in its attempt to contain the appreciation of the real. However, the strength of the Brazilian economy in conjunction with one of the highest interest rates in the world, have continued to attract foreign investors in search of higher yields. It’s expected that the Central Bank raise its Selic rate next week to 11.5% from its current 10.75%, which will likely raise the real up even further.
Brazil is not alone in this concern. Several emerging countries have returned to a robust economic growth, even when developed nations are struggling to reactivate their economies. This lack of balance has lead to a wave of currency interventions around the world. Chile said that this month it would buy 12,000 million dollars in an effort to stop the appreciation of the Chilean peso.