Why did the Central Bank decide to intervene in the foreign exchange market after the dollar rose?

Market participants reacted in a mixed manner this Tuesday to the announcement of an extraordinary auction in the foreign exchange market by the Central Bank, with some analysts minimizing the action and others doubting the intention expressed by the authority to only meet a specific demand, as the first exchange rate intervention under the Lula government comes after a jump in the dollar.

Some operators considered the possibility of the BC carrying out new similar operations in the coming days.

The BC announced on Monday night that it will hold an additional traditional currency swap auction in this session, worth 1 billion dollars, to meet part of the demand generated by the redemption of the NTN-A3 bond, linked to the exchange rate, scheduled for 15 Of april. This will be the authority’s first non-rollover intervention in the foreign exchange market since the end of 2022.

The NTN-A3 is a public bond indexed to the dollar that has not been traded by the National Treasury for years, but there are still institutions in the Brazilian market that hold the paper in their portfolios. On April 15, a Monday, a total of 18.534 billion reais in NTN-A3s that were negotiated in 1997 are scheduled to mature. In current values, the papers are equivalent to around 3.6 to 3.7 billion reais. dollars, according to market participants.

Holders of NTN-A3s in Brazil, over the years, have carried short positions in dollars to cover exposure to these securities, so that, with the maturity of the securities, it is necessary to close these positions — which is done through purchase of dollars, with the potential to fuel the rise of the US currency.

“This intervention has nothing to do with the strong rise (of the dollar) yesterday, but with meeting a specific demand”, said Guilherme Esquelbek, from Correparti Corretora, also stating that this is the view of other of his fellow investment analysts. Marketplace.

But some financial agents estimate that the recent devaluation of the real — after the dollar jumped 0.86% the day before, to its highest closing value since October 13 last year, accumulating an increase of 1.57% in two business days — may have influenced the BC’s decision to intervene in the market.

“Officially the Central Bank is using as justification the maturity of debt securities on April 15th… but in reality it could have carried out this intervention on any day between the 2nd and the 15th,” said Leonel Mattos, an analyst at StoneX market intelligence.

“It is a fact that the recent devaluation of the real must be worrying the Central Bank, which is actually seeking to contain a more significant upward movement and reduce exchange rate volatility”, he added.

Alfredo Menezes, partner at Armor Capital, wrote: “It is known that NTNa’s volume is around 3.6 billion dollars. The BC usually acts when the market is dysfunctional. If it is to meet the demand due to the expiration of the NTNa, why didn’t you announce the full lot (3.6 billion) but just 1 billion?”

In this sense, some market participants question the possibility of having other similar auctions until the maturity date of the public bonds in question.

“It was up to our BC to provide 1 billion to partially compensate for the maturity of this asset in dollars… (Will the BC) complete the 2.6 billion by then? This event ‘weakens’ the BC’s thesis concerned with the level of the dollar”, said Roberto Motta, from the futures desk at Genial Investimentos.

Fernando Bergallo, operations director at FB Capital, said that the extraordinary auction combined the useful with the pleasant. According to him, the BC probably monitored the effects of the erosion of the NTN, predicted that this would put even more pressure on the exchange rate — at a time of already abundant demand for the dollar — and thus sought to balance market liquidity.

“I think that, under the management of Roberto Campos Neto, there will always be minimal and punctual intervention in the market. The perception is that, given the excess liquidity and the struggling US economy, trying to contain the exchange rate will be drying up,” added Bergallo, referring to the possibility aired in the markets that there will be new extraordinary interventions by the Central Bank ahead.

The foreign exchange market had a moderate reaction to the news of the auction. At the opening of this trading session, the spot dollar fell 0.72%, to 5.0226 reais, with traders saying it was a reaction to the announcement of swaps. However, the currency gained momentum throughout the day and fell just 0.22% at around 11:20 am (Brasília time).