SAO PAULO (Reuters) – The Central Bank on Friday sold US$2 billion in currency sale auctions combined with purchase auctions on the interbank market, in an operation it had not carried out since the end of 2021.
The BC uses this instrument mainly in times of lack of liquidity in the spot foreign exchange market, which normally occurs at the end of the year. The market comment is that the BC may have carried out the operation to adjust the exchange coupon (interest rate in dollar), which accelerated the rise recently.
One-off corporate demand was also cited by operators as a reason for the BC extraordinary auction.
The spot dollar had a strong rise against the real this Friday, replicating generalized risk aversion abroad, but until the day before the real had been showing one of the best global performances, supported by high interest rates in Brazil and the prospect of an economic policy. more pragmatic in the next government.
The BC announced the auction notice on Thursday night and, when holding them this Friday, accepted two proposals, with a cut rate of 4.190000%. The liquidity placement will settle on the 27th and the currency buyback is scheduled for the 3rd of November.
Currency sale combined with purchase – also called line auction – consists of a dollar transaction in the spot market together with a forward dollar auction at the inverse end. Thus, it does not affect the foreign exchange exposure of the institutions involved; in theory, therefore, with no direct effect on exchange market prices.
When intervening in the market, the monetary authority usually uses more exchange rate swap contracts, which allow exchange of yields. In the case of the traditional exchange rate swap, the BC pays the exchange rate variation in the period plus the exchange coupon to the market; in exchange, swap borrowers agree to remunerate the BC at the Selic rate.
The BC’s objective with this instrument is to avoid a dysfunctional movement in the exchange market, providing exchange hedge –protection against excessive variations in the dollar against the real– and liquidity for businesses. The placement of traditional swap contracts, therefore, works as an injection of dollars into the futures market.
Another type of foreign exchange intervention instrument is the direct sale or purchase of dollars in the spot market, which is more unusual, however.
(By Luana Maria Benedito and José de Castro)