Understand what a swap is, an operation that the BC uses to hold the dollar

Faced with the third day of significant increases in the dollar against the real, the Central Bank sold on Tuesday (26) US$ 500 million in a type of contract called swap, which aims to control the volatility of the currency.

When the BC offers a swap contract, it is equivalent to selling dollars on the futures market. In this way, the monetary authority seeks to ensure that there is supply to meet an increase in demand for foreign currency. With this, he tries to prevent this demand from raising prices and increasing volatility in the exchange rate.

Economist Cristiane Quartaroli, from Banco Ourinvest, highlights that the holding of auctions is part of the BC’s routine, but that the exchange swap auction is promoted when the monetary authority intends to contain more expressive increases in the currency.

Piter Carvalho, economist at Valor Investimentos, also says that extraordinary auctions are usually held on “tense” days in politics or the economy. “It is obvious that the BC will not wait for the most tense moment, it manages to control it little by little to make even a smooth movement of the currency, whether up or down,” he said.

This Tuesday’s auction, according to him, was used by the BC to try to contain the soaring price of the American currency, which “goes down stairs and goes up in elevator” in Brazil. “The Central Bank acted to hold back the currency fluctuation a little,” he said.

The operation took place after the dollar touched the rate of R$ 5 on Tuesday morning, but its effect was not significant. After the announcement of the Central Bank’s intervention, the American currency fell, but remained under pressure and returned to show traction. At the maximum of the day, it reached R$4.9996 and closed at R$4.9901, a level that had not been reached since March 18.

This Tuesday, the BC held an extraordinary auction of 10,000 traditional foreign exchange swap contracts. All contracts offered were sold, with 3,250 maturing on December 1, 2022 and 6,750 maturing on April 3, 2023.

Last Friday (22), the BC sold US$ 571 million on the foreign exchange spot market, in the first such operation this year.

At the time, the dollar had soared 4.04%, rising to R$4.8060, the highest value since the end of March and the strongest daily percentage increase since the beginning of the Covid-19 pandemic, in 2020.

Why is the dollar rate tending to rise?

The dollar still remains at high levels, among other reasons, because of the prospect of a more aggressive interest rate hike by the Fed (Federal Reserve, the central bank of the United States). When US interest rates rise, they end up attracting investors from other countries, and this outflow of dollars from Brazil makes the price rise.

Another factor that has driven up the price of the dollar is the fear of new restrictive measures in China due to the advance of Covid-19: the prospect of a greater shock in the global economy leads the market to look for safer assets, such as the American currency or US government bonds.

Equities and bonds linked to emerging economies, such as Brazil, are seen by foreign investors as risky assets. Emerging currency pairs of the real, such as the Mexican, Chilean and Colombian pesos, however, have been feeling the effects at a slower pace.

That’s because it’s not just external factors that are cause for concern, according to experts. Quartaroli highlighted the tension between the government and the judiciary after President Jair Bolsonaro (PL) challenged the Federal Supreme Court (STF) and granted a pardon from grace to deputy Daniel Silveira (PTB-RJ).

“If we compare the real with other emerging currencies, it is standing out in a negative way. The internal political noise ends up affecting the image of our country, generating an institutional crisis, which is frowned upon by foreign investors,” he said.

Swap is like opening a new exit door at a crowded party

“We see a short-term capital flow withdrawal due to this uncertainty and political noise”, he added.

According to Carvalho, this investor who tends to buy dollars to withdraw money from Brazil seeks immediate profits. “He doesn’t want money to build a company, do a long-term project, it’s speculative money that fluctuates between the markets.”

And the foreign exchange swap auction is a way for the BC to give this investor an outlet. “Imagine you have a crowded party and the exit is a small door. When the BC sells, it opens another door for people to leave faster. What does this investor need to get out? Buy dollars. And what does the BC do? dollar for him”, he illustrated.​

In the Focus survey released this Tuesday morning, after almost a month without publication due to the strike by BC servers, the median market projection for the exchange rate pointed to the dollar at R$5 at the end of both 2022 and 2023.