Strong inflow of American currency through exports and lower volatility of the real allowed the authority not to hold auctions
By Arthur Cagliari — From São Paulo
The positive environment built over the past year in the domestic exchange rate was evident in addition to the fall in the dollar, which went from R$ 5.27 to R$ 4.85 in the period. For the first time since 1999, the Central Bank (BC) did not intervene in the market through new auctions, given the lower volatility of the real and the gradual appreciation of the Brazilian currency in 2023.
O Value crossed information from the database on the BC's actions in the foreign exchange market with the monetary authority's announcements, which distinguish new actions from those that only used old instruments. The data obtained showed that no new auctions were held in the foreign exchange market last year, either via foreign exchange swap contracts or through the sale or purchase of dollars in cash. Furthermore, the BC also did not hold new line auctions (sale of dollars with repurchase commitment).
It was, therefore, the smallest interference in the exchange rate by the Central Bank since the floating exchange rate regime began to be adopted in the country, in 1999. During this period, the BC historically made interventions in moments of stress and strong volatility of the Brazilian currency.
“Despite noise about Brazilian economic policy at the beginning of [last] year and a more adverse external environment between August and October, exchange rate volatility was much lower than in other years”, says the chief strategist at Warren Investimentos, Sérgio Goldenstein, who previously headed the BC's Open Market Department (Demab). “We did not see a dysfunctional exchange rate to justify interventions.”
In 2023, the monetary authority carried out two rollovers of “lines” at the beginning of the year and, over the months, carried out full rollovers of currency swap contracts. “But the rollover is a neutral stance by the BC”, says Goldenstein. “In fact, if the BC were carrying out a partial rollover, then it would be affecting the exchange market”, he says, adding that the authority’s only intervention would have occurred not through new auctions, but by letting the lines rolled over at the beginning of the year expire. in the first semester.
“We did not see a dysfunctional exchange rate to justify interventions”
— Sergio Goldenstein
However, what most caught the attention of Goldenstein and other market participants was the absence of line auctions at the end of last year, especially in December. Generally, as it is a period of capital outflow through remittances from multinationals to their headquarters and also through payment of dividends to foreign investors, the monetary authority usually carries out specific actions in the market offering lines to contain possible excess volatility. Line auctions do not affect the exchange rate directly, but rather the short-term exchange coupon – a derivative that summarizes interest in dollars.
When questioned by the report, the Central Bank said it had not identified any dysfunction in the foreign exchange market that would justify intervention.
What would explain the no need for line auctions at the end of the year would be a “perfect astral alignment”, in the words of the former director of monetary policy at the BC and partner at Panamby Capital, Reinaldo Le Grazie. In addition to the exchange flow having helped, other factors that previously weighed on exchange rate volatility are now no longer present. “The exchange rate 'overhedge' [extra protection of foreign currency assets abroad] by banks and the leverage of Brazilian companies abroad contributed to the devaluation of the real in 2021 and 2022. Without these points in the last year, we have seen a lull.”
In relation to the exchange flow, Le Grazie mentions not only the strong and significant inflow of dollars via the commercial account, but also the performance of the financial account, which could have been worse if the external scenario (especially the discussions on American interest rates) had deteriorated at the end of the year. “We had some financial flow inflow in November that helped in this sense”, he says.
In the same vein, Carlos Kawall, director of Oriz Partners and former secretary of the National Treasury, states that the external environment and the Federal Reserve (Fed, American central bank) with a softer tone at the end of the year helped the exchange rate, but it was the trade flow the key point to contain currency volatility. “We had wars, bank failures and high long interest rates in the USA. All of this would have had greater effects in Brazil if it were not for the exchange rate being anchored in this more vigorous trade flow.”
In 2023, the foreign exchange flow was positive at US$ 11.4 billion, according to data from the Central Bank, in the largest capital inflow in the country since 2012. This result derived from a net inflow of US$ 49 billion via the commercial account, while the financial company recorded an outflow of US$ 37.6 billion.
Kawall recalls that, while in 2022 the trade flow gained more robustness due to the rise in commodity prices, last year it was the volume of exports that was responsible for the magnitude of capital inflow into the country. “The fact is that we are now beginning a phase of trade surplus that is a little more structural, which does not have so much to do with the price of commodities, but rather with the quantities exported. And this comes from both agriculture and oil”, he states.
The former Treasury secretary also says that the good flow of capital entering the country via commercial account could mean that, in the coming years, the particularity of 2023 will be repeated and line auctions will not be necessary at the end of each year . Furthermore, Kawall assesses that banks can go from being in a short position in dollars in the spot market to being in a long position.
“If banks have a long dollar position in the spot market, the Central Bank may eventually offer less swap and/or even buy a 'spot' dollar. I'm not saying that this will happen because it's an exchange rate policy decision, but it's a possibility”, says Kawall. The banks' short position in dollars, according to BC data, fell gradually over the last year until reaching US$ 1.9 billion in November, the lowest level since August 2018.
Armor Capital's partner and investment director, Alfredo Menezes, who was previously treasury director at Bradesco, remembers that the banks' position is derived from the real flow of the economy, if the Central Bank does not intervene in the market. As the monetary authority did not interfere, the banks' small short position at the end of the year was a result of the strong inflow into the country, he explains.
“This shows that we may have room for a strengthening of the real at the beginning of the year, with calmer months for the flow, because that is when grain exports begin to grow”, he says. “December being calmer, with no line auctions, signaled that the dollar’s breakeven point could be lower.”
SOURCE: https://valor.globo.com/financas/noticia/2024/01/09/cambio-tem- Primeiro-ano-sem-intervencoes-do-bc-desde-1999.ghtml 1/12