The past year’s favorable conditions in Brazil’s domestic exchange rate market became evident through the real’s appreciation to the dollar from R$5.27 to R$4.85 and the country’s Central Bank’s unprecedented approach since 1999. For the first time in over two decades, Brazil’s Central Bank did not initiate any new auctions to intervene in the market. That change was attributed to the Brazilian real’s decreased volatility and gradual appreciation in 2023.
In-depth analysis by Valor, cross-referencing historical database information with the Central Bank’s press releases, clarified the nature of such interventions. The distinction was made between new actions and those simply renewing existing instruments. The investigation revealed that the Central Bank did not conduct any new auctions in the foreign exchange market in the past year, whether through currency swap contracts or by dealing in spot dollars. Additionally, it abstained from initiating repurchase auctions, which involve selling dollars with a commitment to repurchase.
Such an approach marked the least amount of intervention by the Central Bank in the exchange rate since Brazil adopted the floating exchange rate regime in 1999. Historically, the Central Bank has intervened during high-stress and volatility periods in the Brazilian currency.
“Despite early-year concerns about Brazilian economic policy and a challenging external environment between August and October, the exchange rate volatility was significantly lower compared to previous years,” noted Sérgio Goldenstein, chief strategist at Warren Investimentos and former head of the Central Bank’s Open Market Department (DEMAB). “The exchange rate is no longer dysfunctional to warrant interventions,” he added.
In 2023, the monetary authority executed two repurchase rollovers at the year’s start and subsequently conducted complete rollovers of currency swap contracts. “However, a rollover represents a neutral position by the Central Bank,” Mr. Goldenstein explained. “A partial rollover would indeed impact the foreign exchange market,” he noted, adding that the only actual intervention by the authority was not initiating new auctions but allowing the repurchase agreements rolled over at the beginning of the year to mature in the first half.
What particularly stood out to Mr. Goldenstein and other market analysts was the absence of repurchase auctions at the end of last year, especially in December. Typically, this period sees capital outflows due to multinational remittances to headquarters and dividend payments to foreign investors, prompting the monetary authority to engage in temporary market actions, like offering repurchase auctions to mitigate potential volatility spikes. While repurchase auctions don’t directly influence the exchange rate, they do affect the short-term exchange coupon—a derivative reflecting interest in dollars.
When queried by Valor, market experts acknowledged that they hadn’t identified any dysfunctions in the foreign exchange market that would require intervention.
Reinaldo Le Grazie, a former C-level executive at BCB and partner at Panamby Capital, describes the absence of repurchase auctions at the year’s end as a result of a “perfect astral alignment.” He noted that, apart from favorable currency flows, other factors previously affecting exchange rate volatility were absent last year. “In 2021 and 2022, the real’s devaluation was influenced by banks’ ‘overhedge’ of foreign currency assets and Brazilian companies’ leverage abroad. Last year, these issues were not present, leading to a more stable scenario,” he explained.
Mr. Le Grazie also highlights the significance of the foreign exchange flow, mentioning the robust dollar inflows through trade and the performance of the financial account. He suggests that the situation might have been less favorable had the external environment, particularly discussions around American interest rates, worsened towards the end of the business year. “There were some financial inflows in November that supported this aspect,” he added.
Carlos Kawall, a member of the Board of Executive Officers at Oriz Partners and former Secretary of Treasury, notes that while the global environment and a softer stance from the Federal Reserve (Fed) at the end of the year positively impacted the exchange rate, it was the trade flow that primarily kept the currency’s volatility in check. “Despite wars, bank failures, and prolonged interest rate hikes in the US, these factors would have had more significant consequences in Brazil if not for the exchange rate being anchored to a stronger trade flow,” he stated.
In 2023, Brazil experienced a positive foreign exchange flow of $11.4 billion, the highest capital inflow since 2012, as reported by the Central Bank. Such an outcome resulted from a net inflow of $49 billion through the trade account, while the financial account saw an outflow of $37.6 billion.
Mr. Kawall also points out that in 2022, the robust trade flow was mainly due to increased commodity prices, but in the following year, it was the volume of exports that significantly contributed to the capital inflow. “We are entering a phase of a more structurally sustained trade surplus, which is less about commodity prices and more about the volume of exports, coming from both the agricultural and oil sectors,” he remarked.
The former Treasury Secretary also suggests that the robust capital inflow via the trade account could mean that the unique situation of 2023, where repurchase auctions were unnecessary at year-end, might recur in the coming years. Additionally, Mr. Kawall anticipates a possible shift in banks’ positions from short to long in the dollar spot market.
“If banks maintain a long position in the dollar on the spot market, the Central Bank might reduce swap offerings and/or even purchase spot dollars. While this is contingent on foreign exchange policy decisions, it remains a possibility,” Mr. Kawall explained. Central Bank data indicates that banks’ short dollar positions decreased progressively throughout the year, reaching a low of $1.9 billion in November, the lowest since August 2018.
Alfredo Menezes, partner and investment director at Armor Capital and former treasury officer at Bradesco, notes that banks’ positions reflect the economy’s actual flow if the Central Bank abstains from market intervention. He attributes the banks’ short position at year-end to the significant capital inflows into the country, resulting from the Central Bank’s non-intervention.
Mr. Menezes further suggests that these dynamics could strengthen the real at the start of the year, particularly during the calmer months for flow when grain exports begin to increase. “The quiet December, marked by the absence of repurchase auctions, indicates that the dollar’s equilibrium point might be lower,” he concluded.
Translation: Melissa Harkin
