Brazil intervenes with 8 billion dollars to stop the rise of the currency and leaves it at 6.14 reais

In a concerted effort to stop the run against the real, which reached 6.6 per dollar on Wednesday and opened this Thursday at 6.30, The Central Bank auctioned two huge batches of a total of 8 billion dollars. First he intervened with three billion dollars on the morning of this day and since he did not achieve the desired effect, he added another 5 billion. Finally, the currency settled at 6.1495 reais, a drop of 1.69% compared to Wednesday’s close (6.26).

A conclusive fact of the difficulties with the market is seen in the fact that since last Thursday the 12th and until the beginning of this week The Central Bank has already injected US$ 12,760 million into the marketin seven spot auctions or with repurchase commitments (online auction), in the largest intervention in a single month since March 2020.

The country has strong firepower with currently estimated reserves at 357,118 million dollars.

The origin of this problem is the markets’ distrust in the public spending reduction policies announced by the Minister of Finance, Fernando Haddad, on November 28. The first reaction to that package was a fall to a historic low of 6.10 reais per dollar, just like the stocks.

The government initiative cuts about 12 billion dollars in a first stage. But there were reproaches because it was considered insufficient while a proposal by President Luiz Inácio Lula da Silva was added to exempt the lowest salaries in the economy from taxes.

“The announcement of the fiscal package was perhaps the government’s last opportunity to signal that it is concerned about the trajectory of the debt,” Rafael Oliviera, an equity fund manager at Kinea Investimentos, said at the time. “Local investors are throwing in the towel.”

With this Thursday’s injections, the intervention in the face of this challenge is already reaches 20.7 billion dollars. Haddad had pointed out 24 hours ago that the exchange rate is floating and should stabilize. According to the minister, inflation forecasts indicate an improvement in the scenario. “The inflation forecasts for next year, the exchange rate forecasts for next year, are better than what speculators do,” he said.

The Central Bank calculates a GDP expansion of 3.5% by 2024 above forecasts. But, the cost of living index will be 4.9%, breaking the maximum line of the goal set by the Central.

Analysts point out that the big issue to resolve is the fiscal line. Felipe Salles, chief economist of Banco C6, in an article for Estadãosaid that for the dollar to return to lower levels, it is important for investors to warn that The Brazilian fiscal trajectory is sustainable. That is to say, spending will not skyrocket.

Brazil’s fiscal deficit rose last October to 9.52% of GDP. In the general table it is noted that the Central announced an increase in interest rates to 11.25%.

With this reference, Salles maintains that “generally, an increase in interest rates attracts foreign capital and causes a fall in the dollar, which lowers the price of imported products, with an impact on inflation.” But this dynamic, now, has not worked, he affirms. “In a context of high debt, the increase in interest rates rapidly increases the nominal public deficit, worsens the debt trajectory, “It generates risk aversion and puts pressure on the dollar.”

The economist’s assessment is that it is too early to say at what level the dollar will stabilize. “But, if the exchange rate remains at current levels, we will continue to see rising inflation and a Central Bank under pressure to keep interest rates high for longer. The best possible way to reverse this scenario is through fiscal policy, ideally through spending cuts. “The cost containment package is going in the right direction, but additional measures need to be implemented.”

Matheus Massote, foreign exchange specialist at One Investimentos, explains the Sheet that “the long-term trend of the dollar is bullish. “We are in a time of high volatility… The rise in the dollar makes international travel, small orders, imports made by individuals and other operations more expensive.”

The future president of the Central Bank, Gabriel Galípolo, appointed by Lula (he replaces Roberto Campos Neto, appointed by his predecessor Jair Bolsonaro) rejected that there is “a speculative attack on the financial market as a cause of the rise of the dollar.”

”It is not correct to treat the market as a monolithic block, say, as if it were a single thing, that is coordinated and moves in a single direction”. Haddad had suggested that possibility in his remarks Wednesday.

Galípolo added that the government recognizes the diagnosis that there are problems that must be faced and that the control of public accounts is a continuous effort. However, the future president of the BC who will take office on January 1, highlighted that There is no “miracle solution” to solve the issue.. He also stressed that “inflation is very bad for the population, and the BC will do the necessary work to put inflation on target,” suggesting that the tool of high rates will continue as before, despite public demands in against Lula.