Brazil Central Bank Holds Biggest Dollar Auction in 4 Years

(Bloomberg) — Brazil’s central bank conducted its biggest dollar auction in the spot market since the first weeks of the pandemic on Monday as it fights to regain control over inflation expectations amid a soaring fiscal deficit.

The currency briefly rebounded after the bank sold $1.63 billion Monday, before falling once again, trading near a record low. The real was down 0.1% at 6.0649 to the dollar as of 11:51 am in Sao Paulo.

The nation’s central bank has been pulling out all the stops to curb a currency selloff, raising interest rates and now intervening directly in the market. But the measures are having limited impact as surging government expenditure pushes up inflation expectations. The budget deficit is currently running at about 10% of Brazil’s gross domestic product.

“The intervention should not change the trend, which continues to be driven by the strong global dollar and fiscal uncertainties,” said Ian Lima, money manager at Inter Asset.

Brazil’s currency hit a record low on Nov. 29 amid persistent concerns about the nation’s budget deficit, and is among the worst performers in emerging markets so far this year. 

The monetary authority also sold $3 billion in a credit-line sale on Monday. Through FX credit-line auctions, the central bank sells the so-called dollar spot and pledges to buy it back in the near future in exchange for a certain interest rate. Those moves try to supply liquidity to the spot market.

The intervention comes after policymakers late Wednesday delivered a 100 basis point interest rate hike and pledged two more increases of the same magnitude — a “shock and awe move” that surprised investors. And then on Friday, the central bank sold $845 million in its first spot auction since August, and announced today’s credit-line sale. 

Still, central bank director Gabriel Galipolo — who is set to take the helm of the monetary authority in January — said in late November that the central bank would only act if the market was behaving in a dysfunctional manner.

“We still need to understand the function of the new central bank’s reaction to the exchange rate,” Lima said.

It’s not atypical for the central bank to hold credit-line and spot auctions. In August it sold $1.5 billion in an auction, amid weeks of volatility in the nation’s currency. 

What Bloomberg Economics Says

“It’s too soon to tell whether this is a policy shift or a one-time move. If it proves to be a change in tack, we’d expect markets to shun it. In an extreme case, the tactic could inject more uncertainty on the fiscal outlook, risking even further currency weakness.” 

— Adriana Dupita, Brazil and Argentina economist

— Click here for full report 

–With assistance from Kevin Simauchi and Srinivasan Sivabalan.

(Updates with pricing starting in second paragraph, adds commentary)

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