US$4.055 billion. That is how much money left Brazil, on a net basis, in a single week, according to Central Bank data released on Wednesday (26). In response to the dollar outflow, the monetary authority held two simultaneous US$1 billion auctions on Thursday morning (27) to inject liquidity into the foreign exchange market, making sure dollars remain available for those who need to buy them.
The move matters to ordinary Brazilians because capital outflows push the dollar up. The U.S. currency closed Wednesday at R$5.1533, up 0.23%, and every cent added to the exchange rate makes imported goods, fuel and foreign travel more expensive. The US$4 billion that left the country in seven days is worth about R$21 billion at the current rate.
In the first operation, the Central Bank sold US$1 billion in spot dollars, accepting 12 bids. In the second, it offered 20,000 so-called reverse currency swap contracts, also worth US$1 billion, maturing on October 1, according to Reuters. The last such operation had taken place on June 22.
How it works
Together, the two auctions form what traders call the "casadão", Portuguese for "big pairing". A currency swap is a contract that works like a future sale of dollars, and a reverse swap does the opposite, working like a future purchase. Because the bank sold US$1 billion in the spot market and bought the same amount in the futures market, the effect on the exchange rate is, in theory, zero: the goal is to supply liquidity without steering the price.
Brazil's foreign exchange flow for August is negative by US$2.55 billion from the start of the month through Friday (21). Currency traders quoted by Folha de S.Paulo said Thursday's auctions were likely driven by that flow. They noted that the Central Bank only steps in when it detects an imbalance between dollar supply and demand.
"The premise is that we faced heavy financial outflows in Thursday's session and that is why the operation was needed," Leonel de Oliveira Mattos, a market intelligence analyst at brokerage StoneX, told Folha. He said the bank monitors dollar demand to act preventively and has also been reducing its stock of swap contracts.
The outflow comes at a time of weak external accounts. The Central Bank reported this week that the current account, the broadest measure of Brazil's transactions with the rest of the world, posted a US$8.11 billion deficit in July, above what analysts surveyed by Reuters expected.