Some Thoughts on Brazil FX Policy - BBH

Analysts at Brown Brother Harriman noted that comments from BCB President Goldfajn suggest discomfort with the firm BRL. In a speech today, Goldfajn noted that the bank “may, if it wants, roll over partially, fully or not roll over and that will be determined by the market conditions that we assess that can happen throughout the month.” Goldfajn was referring to March 1, when there are reported $7 bln of FX swaps expiring.

Key Quotes

"Recall that FX swaps are auctioned when the central bank wants to support BRL. Though no FX actually changes hands, the FX swaps work the same way as increasing the supply of USD. By not fully rolling the expiring swaps, the bank would ultimately decrease the supply of USD, which would tend to push USD/BRL higher. Note that there are around $26.5 bln total FX swaps outstanding, so the March 1 number represents more than a quarter of that total."

"Clearly, the comments suggest policymakers are getting concerned about excessive BRL strength. Indeed, it appears that 3.10 is shaping up to be a key level. USD/BRL tested this level earlier today, which may have triggered Goldfajn’s comments. This area was also tested last October (3.1020 low) and last August (3.1140) but held."  

"A more forceful response to ongoing BRL gains would be auctioning reverse FX swaps. Reverse FX swaps work the same way as decreasing the supply of USD, which would tend to push USD/BRL higher. Note that the BCB last auctioned reverse FX swaps back in October, when the 3.10 area was being threatened."

"Aggressive rate cuts should lessen BRL’s appeal. The next COPOM meeting is February 22, and another 75 bp cut to 12.25% is likely."

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