Itaú BBA - Domestic uncertainties pressured the BRL during the week

FX and Capital Markets

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Domestic uncertainties pressured the BRL during the week

December 4, 2017

The BRL depreciated on rumors that the pension reform may only be voted in 2018.

(full report attached)
 

Brazilian currency weakened due to uncertainties surrounding the pension reform

The Brazilian currency appreciated earlier in the week, but lost momentum, particularly later in the week, on rumors that the pension reform may only be voted in 2018. On Friday, the exchange rate closed at 3.26 reais per U.S. dollar, depreciating 0.8% and underperforming most of its peers (Charts 1, 2, 3 and 4).

Central Bank announced the rollover of FX swap contracts due in January

The monetary authority announced last week that it will start to roll over swap contracts due in January 2018, at a pace of 14,000 contracts per day. If this pace is sustained until December 20, the Central Bank will fully roll over the $9.6 billion in contracts expiring in January. Its stock of FX swaps now stands at $24 billion (Charts 5 and 6). 

Currency flow goes back to negative territory 

The currency flow became negative again last week, driven by $190 million financial outflows and $808 million trade outflows. In November, the flow was negative by $3.0 billion (Charts 7 and 8).

New bond offerings abroad 

Last week, a Brazilian financial services firm issued $300 million in perpetual bonds, while a utility company issued $1.0 billion in securities due in 2024. Brazilian bond offerings total $28.4 billion in the year through November, topping the $20.4 billion issued during 2016 as a whole (Chart 9 and table).   

Foreign flows to the stock market are negative in November

Foreign flows to the stock market were negative by $610 million during the month, as $913 million outflows from the spot market outsized $303 million inflows to the futures market (Chart 10).

Changes in FX derivative positions last week 

Non-residents increased their long position in FX derivatives, while institutional investors reduced their short position in the same securities. Non-residents, banks and institutional investors hold FX derivative positions (dollar futures, cupom cambial and swaps) of $16.2 billion, $8.7 billion and $ -1.6 billion, respectively (Charts 11, 12, 13 and 14).



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