Real strengthens after Central Bank interventions

The Brazilian real has shown signs of strengthening after the country’s Central Bank stepped in to end a run of five-year lows against the US dollar

Real strengthens after Central Bank interventions

World Bulletin/News Desk

A new strategy adopted by Brazil’s Central Bank on Thursday to end a run of five-year lows for the country’s currency, the real (BRL), against the US dollar (USD), appears to have worked after the markets witnessed the real-dollar rate jump in Brazil’s favour, on Friday.

After the dollar reached 2.45 reals on Wednesday, the highest rate since 2008, the new Central Bank currency interventions, which will see the bank perform daily currency auctions to add liquidity to the market, precipitated a 0.78-percent drop in the rate on Thursday, and a further 3.23-percent fall on Friday – the biggest daily drop in two years.

The dollar now bought around 2.35 reals at the end of play on Friday. However, this is still far above rates seen earlier this year, when the dollar bought around two reals.

The dollar has gained 15.1 percent on the real so far this year. Other emerging market currencies have also fallen consistently against the dollars due to speculation over higher interest rates in the US over the last three months.

On Thursday, the Central Bank announced it had sold future repurchase operations totalling 4 billion USD – a tactic which paid off, as the real immediately strengthened against the dollar.

New strategy to bolster real

Buoyed by the success, the Central Bank announced it would begin a long-term currency intervention program to provide 60 billion USD of cash and insurance to the foreign exchange market by the end of 2013.

The program will see the Central Bank spend 500 million USD on currency swap markets Mondays to Thursdays. The derivatives are used by companies and investors to hedge their currency exposure.

On Fridays the bank will buy reals on the spot market through repurchase agreements to the tune of 1 billion USD in directly in return for dollars. The program is set to run until December and repurchasing is scheduled for January 2, 2014, according to the bank.

Although the new strategy appears already to have given results, the Central Bank has not yet revealed how much it managed to sell on the two days: information about this should be released next Wednesday.

More bang against the buck

The fall of over 3.2 percent that the dollar experienced against the real on Friday was the biggest drop since September 2011, apparently reacting strongly to the Central Bank’s new currency-intervention policy.

Although many had voiced concerns that the strong dollar meant Brazilians would soon start feeling the pinch again, as raw materials and imports go up in the price, others have relished the stronger dollar, particularly by industry in Brazil.

Previously, the main concern about the Brazilian economy had been the rate of inflation and its impact on Brazilians’ spending power.

Experts say that the new strategy announced on Thursday was a sign of the monetary authorities’ determination to keep the dollar-real rate from slipping further at a time when the government is looking for ways to control inflation and simultaneously kick-start Brazil’s sluggish economy.

The bank’s monetary policy committee, Copom, which sets Brazil’s benchmark interest rate, the Selic, is set to meet on August 28 and analysts believe there is a good chance the committee will agree to raise the Selic to 9.0 percent, up 0.5 percent.

Brazil also announced on Thursday it had revised down its outlook for GDP (gross domestic product) growth once again, this time from 3.0 to 2.5 percent, and from 4.5 to 4.0 percent for 2014. The markets have recently given a gloomier prognosis – of around 2.2 percent for this year, and 3.0-3.5 percent for 2014.

Güncelleme Tarihi: 24 Ağustos 2013, 10:36