Friday was an exciting day for the Brazilian real. It began with the news that the Brazilian Central Bank (BCB) had intervened in the spot market to the tune of USD 1.5 billion to support the Brazilian real. The reason given by outgoing Governor Campos Neto was that the intervention was made to offset the effects of the regular rebalancing of the MSCI index. This is expected to lead to BRL outflows this month, Commerzbank’s FX strategist Michael Pfister notes.

BSB confuses market players

“We remain skeptical that the BCB is sending the right signal. Almost as if it wanted to make it clear that there was no fundamental reason for the intervention. The central bank chief tried to capture market expectations on Friday by stressing that any rate hikes would be ‘gradual’. Expectations had taken on a life of their own in recent months. The market is now pricing in just about 100 basis points of rate hikes over the next three months, with further hikes to follow.”

“Friday saw more news on the budget, although not too many details have been released yet, but it seems that policymakers are focusing on increasing revenues rather than reducing spending. This has caused some concern in the market. While the details of the budget plan remain to be seen, there are concerns that the authorities will not use the new budget to reassure the market, but rather to deliver a plan that is not yet fully developed.”

“The BCB later announced that it was offering additional FX swaps in its regular swap auction to sell an additional USD 1.5bn and support the BRL. It was not entirely clear whether the swap auction had been planned all along and was intended to work in conjunction with the original spot action, or whether it had been announced at short notice to capture the renewed BRL depreciation in response to Neto’s comments and the budget hints.”