Itaú BBA - Copom Statement Put Pressure on the Real

FX and Capital Markets

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Copom Statement Put Pressure on the Real

December 8, 2014

The Brazilian real appreciated until Wednesday, on the back of the expected interest-rate increase by the Central Bank’s Monetary Policy Committee.

(full report attached)

The Copom statement influenced the exchange rate last week

The Brazilian real appreciated until Wednesday, on the back of the expected interest-rate increase by the Central Bank’s Monetary Policy Committee (Copom). But although the Selic rate increased, some in the market read the statement that announced the decision as a sign that the tightening cycle could be shorter. The exchange rate closed the week at 2.588, weakening 0.9% from the previous week’s closing price (Charts 1, 2, 3 and 4).

Central Bank carried out a line auction last week and announced another one for today

In addition to rolling over FX swap contracts due in January at the previously-informed pace of 10,000 contracts per day, the Central Bank also carried out a line auction of $1 billion and announced another one of the same amount for today. The monetary authority normally does these auctions by the end of the year, in order to provide liquidity to the market during a period that is usually market by outflows (Charts 5 and 6).

Currency flow was negative in November

The contracted currency flow was negative in the last week of November, with net outflows from both the trade ($163 million) and financial ($406 million) accounts. Hence, the flow in November was negative by $3.5 billion (Charts 7 and 8).

No bond issuance in international markets in the past week

Borrowings abroad added up to $1.23 billion in November (Chart 9 and table).

Foreign flows to the stock market are negative in December

Flows to the stock market are negative by $716 million in December (Chart 10).

Institutional investors increased their exposure to FX derivatives last week

Institutional investors increased their long positions in dollar futures and FX swaps, broadening their exposure to derivatives to $51.2 billion. Banks also increased their positions, to $36.5 billion, while non-residents reduced their positions to $33.7 billion (Charts 11 and 12).

Outflows from funds dedicated to Brazil continued last week 

During the week ended on December 3, both equity and fixed income funds posted net outflows, of $190 million and $20 million, respectively (Charts 13 and 14).



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