To contain the rise of the dollar, BC announces foreign currency auction

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Central Bank made the announcement in the early evening of this Monday (1st). This is the first intervention made during the Lula government. The Central Bank announced that it will hold an additional “currency swap” auction this Tuesday (2). This operation means selling dollars on the futures market, without involving the country’s foreign currency reserves (understand below). This is an indirect intervention in the foreign exchange market — the first under President Luiz Inácio Lula da Silva (PT). The announcement was made this Monday (1st), on a day in which the North American currency was quoted at R$5.06. Swap contracts, even though they are offered on the futures market, influence the dollar exchange rate on the spot market. The operation is used by the Central Bank to avoid strong variations in the foreign exchange market. The term “swap” refers to an exchange and, in the context of a currency swap, the exchange involves cash flows based on two different currencies (in this case, real and dollar). “Stable inflation and growth revised upwards” says Míriam Leitão about the Central Bank report When justifying the swap, the Central Bank explained that this is necessary given the effects of the redemption of the National Treasury Note, subseries A3 (NTN-A3), which They are exchange-linked securities. The redemption date for these bonds is scheduled for April 15th. Therefore, it is interesting for the government to take this measure in order to avoid an increase in the price of the dollar given the increase in demand for the currency. How it works In the auction, the BC specifies the volume of contracts and the swap rate. Market participants (such as banks and other financial institutions) then bid based on these contracts. Once agreed, the contracts have a predetermined expiration date, when the financial adjustment between the parties will take place, based on the variation in the exchange rate and interest rates involved. If the real depreciates in relation to the foreign currency, the central bank pays the difference to the contract holders; If the real appreciates, contract holders pay the difference to the BC.

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