Brazil’s real (R$) set for biggest weekly rise in 2021 as Central Bank steps up intervention

RIO DE JANEIRO, BRAZIL – Brazil’s real on Thursday, March 11th, rallied 2% against the dollar, boosted by another round of central bank intervention in the swaps market and inflation data that analysts said sets the seal on an interest rate increase next week.

February’s 5.2% annual inflation rate was higher than expected and well above the central bank’s year-end target of 3.75%, cementing expectations it will raise its benchmark Selic lending rate by 50 basis points next week and adding fuel to the real’s rally in recent days.

With global market sentiment also positive, the real jumped 2% to close at 5.54 per dollar. The currency is on course for its best week in more than three months.

The central bank’s US$1 billion sale of foreign exchange swaps followed two separate interventions on Wednesday, one a US$1 billion sale of FX swaps and the other a $405 million spot market sale.

After the market had closed, the central bank said it will sell up to $750 million of FX swaps on Friday.

Sergio Goldenstein, strategist at OHMResearch and a former central bank director, believes inflation and fiscal risks have forced the central bank into taking an active policy of pushing the dollar lower.

“The central bank has finally decided to ‘break’ those long of the dollar, pushing it lower,” he tweeted late on Wednesday. “This puts long speculative or hedge dollar positions at risk, and attempts to avert or mitigate a negative spiral.”

The bank’s FX swaps intervention this year now stands at US$7 billion. It has also sold US$5.58 billion in the FX spot market, all in the last few weeks.

This comes as the prospect of higher interest rates is also injecting some life back into the real.

“The market is pricing 50 basis points hike at the next meeting, followed by more hikes down the road,” said Agustin Sicouly, head of Latin American currency trading at Barclays.

“It (higher rates) will give the currency some carry and yield,” he said.