MNI POLICY: Brazil Central Bank Saw No FX Dysfunction Tuesday

The Central Bank of Brazil had still to see signs of dysfunction in foreign exchange markets which would justify intervention by Tuesday, despite the real’s 4.5% slide against the dollar over the past week, MNI understands.

While the BCB is aware that market players are on the watch for intervention, and is conscious of the damage done to investor perceptions by a change to the government’s 2025 fiscal target, by Tuesday it still considered that the currency has been swept up in a broad-based dollar advance against emerging market exchange rates during a reassessment of prospects for Federal Reserve rate cuts.

Under Brazil’s floating rate regime, the BCB only intervenes by selling reserves or conducting additional swap auctions when it perceives dysfunctionality in this market, such as a lack of dollar liquidity or excessive volatility. On April 1, the BCB announced an additional offer of swaps contracts to cover demand for a public bond auction linked to the exchange rate, scheduled for April 15. (See MNI: Brazil To Bolster Legal Basis Of Longer CenBank Swaps)

On Tuesday, the dollar gained 1.64% against the dollar to BRL5.27, the highest level since March 2023. The day before, BCB Governor Roberto Campos Neto called the real’s depreciation a "short-term movement" and mentioned that Brazil’s improved trade balance has made the currency more stable in the longer term. (See MNI: Financial Variables Better For FX Forecasts -BCB Analyst)

"Because our fiscal numbers, especially when you look at the debt-to-GDP ratio, are higher, I think when fiscal comes into play it becomes more fragile. But I think that a lot of it is short-term movement," he said at an event sponsored by the Council on Foreign Relations in New York, noting that the real was a liquid currency.

"Now we are going through this phase of repricing of assets, and I think Brazil is suffering a little bit because of the fiscal dimension of the problem," he said.