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Fed speeches pressure currencies around the world

August 29, 2016

The message given by the Fed led currencies to weaken around the world.

(full report attached)

The possibility of an interest rate hike in the U.S. in 2016 drove international markets

Speeches by Federal Reserve Chairman Janet Yellen and Vice Chairman Stanley Fischer reinforced the probability of an increase in interest rates in the U.S. in 2016. Their message reinforced the economic activity recovery and favorable financial conditions, leading currencies to weaken around the world. In Brazil, the exchange rate ended the week at 3.27 reais per dollar, depreciating 1.9% (Charts 1, 2, 3 and 4).

Central bank maintained the pace of reverse swap auctions

The monetary authority maintained the pace of interventions in the FX market, with reverse swap auctions amounting to $500 million. Currently, the central bank’s short position in FX swap contracts stands at $41 billion. If this pace is sustained, the monetary authority will zero the outstanding amount of FX swaps by year-end (Charts 5 and 6).

Currency inflows in August

The currency flow is positive by $630 million in August, following hefty inflows last week. There were $1 billion trade inflows and $1.6 billion financial inflows registered (Charts 7 and 8).

No Brazilian bond issuance abroad last week 

There were no bond offers by Brazilian companies overseas last week. Year-to-date, issuances abroad total $17.7 billion, vs. $8 billion in 2015. (Chart 9 and table).

Negative foreign flows to the stock market

Foreign flows to the stock market are negative by $142 million in August, as $485 million outflows from the spot market outsized $343 million inflows to the futures market (Chart 10).

Institutional investors are now short in FX derivatives

After reducing their positions in dollar futures by $944 million and their positions in swaps contracts by $788 million, institutional investors now have an overall short position in FX derivatives. Non-residents, banks and institutional investors hold positions of $20 billion, $34 billion and $ -1 billion, respectively (Charts 11, 12, 13 and 14).



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