Itaú BBA - Brazilian Real Strengthens in a Week Marked by ECB and Copom Moves

FX and Capital Markets

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Brazilian Real Strengthens in a Week Marked by ECB and Copom Moves

January 26, 2015

The monetary authority sold $500 million in FX swap contracts last week and rolled over contracts expiring in February.

(full report attached)

The local currency appreciated last week... 

Throughout the past week, the Brazilian real’s strong performance was supported by the decision of the Brazilian Central Bank’s Monetary Policy Committee (Copom) to raise the benchmark Selic interest rate by 50 bps and by monetary stimuli adopted by the European Central Bank. Additionally, the market welcomed the fiscal measures announced by the Brazilian government last week. The exchange rate closed the week at 2.58 reais per U.S. dollar, appreciating 1.6% from the previous week’s closing price and outperforming its peers (Charts 1, 2, 3 and 4).

... while the Central Bank continued to act in the FX market in the same way

The monetary authority sold $500 million in FX swap contracts last week and rolled over contracts expiring in February. Out of $10.4 billion in FX swap contracts due in February, the Central Bank already rolled over $8 billion (Charts 5 and 6).

Currency flow became positive last week

The currency flow inverted the trend observed in previous weeks, posting $2.3 billion in inflows, explained by $3.2 billion in financial inflows. Hence, the currency flow in January is now slightly negative by $94 million (Charts 7 and 8).

No bond issuance in international markets

For another week, no new issuance was announced. The last Brazilian bond placement was in November 2014 (Chart 9 and table).

Foreign flows to the stock market became positive in January

Flows to the stock market are positive by $136 million in January, despite outflows from the futures market (Chart 10).

Non-residents and institutional investors marginally reduced their long positions in FX derivatives 

After having increased their positions in previous weeks, non-residents and institutional investors reduced somewhat their positions in FX derivatives (dollar futures, cupom cambial and swaps) to $34.3 billion and $32.9 billion, respectively (Charts 11 and 12).

Outflows from equity and fixed income funds dedicated to Brazil last week 

Once again, during the week ended on January 21, equity funds posted $380 million in net outflows, while fixed income funds dedicated to Brazil experienced $202 million in outflows (Charts 13 and 14).



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