(Bloomberg) -- Brazil’s central bank is stepping into currency markets as the real has been battered by fiscal concerns at home and a broad slide in risk assets globally.
Policymakers called a FX credit-line auction of as much as $4 billion on Wednesday, according to a statement published Tuesday. Its the first such auction since January 2023. Back in August, the bank had stepped in with its first spot sale since 2021, followed by a swaps auction.
Investors have dumped the real as they question President Luiz Inacio Lula da Silva’s pledges to balance the budget amid a boost in government spending. The currency is down almost 16% this year, one of the worst performances in emerging markets. The surge in the dollar in the past week after Donald Trump’s election last week has only added to woes.
Finance Minister Fernando Haddad initially sought to balance public accounts in 2024, but will likely end the year with a deficit near the tolerance range even after two budget freezes. His team also announced extraordinary credits to battle wildfires across the country, which won’t add to the country’s primary deficit, which excludes interest payments.
The growing distrust of the government’s fiscal commitment has hit inflation expectations, pushing the central bank to increase rates just as the Federal Reserve eases policy. In recent public speeches, governor Roberto Campos Neto has said Brazil’s risk premium is not compatible with the country’s fiscal reality, adding the administration needs to signal a positive fiscal shock to change market perception.
Through FX credit-line auctions, the central bank sells the so-called dollar spot and pledges to buy it back in the near future in exchange for a certain interest rate. Those moves try to supply liquidity to the spot market.
Back in August, the bank announced its first spot sale since 2021 arguing the need for liquidity amid a re-balancing of an index. Shortly after, it auctioned up to 30,000 foreign exchange swaps for the equivalent of $ 1.5 billion.
--With assistance from Vinícius Andrade.
