O central bank surprised investors on Monday night, the 1st, by announcing the first extraordinary action on the exchange rate since December 2022. In addition to the daily rollover auction of 16 thousand swap contracts (800 million dollars), scheduled for 11:30 am, the authority currency will add another 1 billion dollars (20 thousand contracts) an hour later.
According to a statement from the BC, the action aims to “maintenance of the regular functioning of the foreign exchange market, given the demand for foreign exchange instruments resulting from the effects of the redemption of NTN-A3 (National Treasury Note, subseries A3) on 4/15/2024“.
These securities that the authority refers to are papers with a nominal value updated by the variation in the selling price of the dollar. The proximity of maturity can generate a disproportionate search for foreign currency in the market and put pressure on the exchange rate. That would be the explanation for the extra auction.
What is a currency swap?
In currency swap operations, the BC signs a contract with a counterparty that needs to protect itself from exchange rate variations. To this end, it is agreed that the monetary authority will pay, at the end of the agreed period, the variation in the dollar plus an interest rate (“exchange coupon”) while the investor will pay the variation in the Selic rate to the BC.
The idea is to create exchange rate protection (hedge) for the market and guarantee liquidity in the exchange rate to reduce currency volatility. This is because, in this way, the investor will not need to buy dollars, since the contract signed with the BC will guarantee the amount to honor the commitment in foreign currency, whatever the exchange rate at the contract’s maturity.
In the session on Monday, 1st, the dollar ended the day under pressure, quoted at 5.05 reais, the currency’s highest level since October last year. During the year, the American currency appreciated by 3.92%.
Tags: intervenes exchange rate year
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