| RIO DE JANEIRO, June 16
RIO DE JANEIRO, June 16 Brazil's central bank
will likely scale back its foreign exchange intervention program
within the next couple of weeks, hoping that a period of
relative calm in global markets will help it unwind the plan
without causing too much instability for the currency.
Brazil has tried a number of measures to stabilize its
volatile exchange rate, which strengthened in 2011 to levels
that threatened local industry but then weakened too fast in
2012-13, fueling inflation. Rising prices have hurt Brazilians'
spending power, dragging down economic activity as well as
President Dilma Rousseff's popularity.
In one of its most successful initiatives, the central bank
last August started daily auctions of currency swaps.
The derivatives allow the bank to support the real without
selling a single dollar from its $380 billion in foreign
reserves. As a result, the real has been largely stable at
between 2.2 and 2.3 per dollar in recent months.
But for the program to work, holders have to be able - at
least in theory - to trade the swaps for cash in moments of
crisis, which means the value of swaps in circulation cannot
exceed the size of Brazil's foreign reserves.
Some analysts warn that the prudent threshold is much lower
than that, and recommend policymakers curtail the intervention
program even further. The central bank has already reduced the
pace of sales in December, but the stock of swaps has since
swollen to nearly $90 billion.
"The central bank can't sell swaps forever. It ought to use
this instrument in specific situations," said Márcio Garcia, a
visiting professor at Stanford University who has studied
Brazil's intervention program.
"The forex market has been calm. It's not a moment for the
bank to spend its dollar reserves or to sell derivatives that
are backed by the reserves," added Garcia.
So far this year, the real has gained more than 5
percent against the dollar. The gains are partly a result of the
steady supply of swaps but also due to prospects that U.S.
interest rates will not go up before mid-2015.
Unwinding the program has proved to be more difficult than
it seems, however.
When the central bank tried to slow the rollover pace of
expiring swaps earlier this month, the real slumped 1.5 percent
in one day, forcing policymakers to backtrack.
The bank not only returned to its previous rollover pace,
but it promised to keep offering swaps past June 30, an action
aimed at killing speculation that the intervention program's
days are numbered.
Details of the length and the magnitude of the extended
program are still to be announced and a central bank spokesman
declined to provide any new information.
Currently, the bank offers as many as 4,000 swaps worth $200
million in daily auctions, on top of 10,000 contracts to roll
over expiring maturities.
If the central bank keeps its intervention program
unchanged, rolling over 100 percent of expiring contracts, its
stock of swaps would grow to more than $115 billion by the end
of the year, Credit Suisse analysts estimated.
By continuously intervening in the market, the central bank
risks excessive distortions in the forex rate that could deepen
Brazil's economic problems, including a low investment rate and
a current account deficit of nearly 4 percent of gross domestic
The central bank could slow its intervention if the real is
testing the 2.20-per-dollar area, said Win Thin, head of
emerging markets currency strategy with Brown Brothers Harriman
in New York. On Monday, it traded around 2.23 per dollar.
Jennifer Vail, head of fixed income at U.S. Bank Wealth
Management, estimates the central bank could still increase the
amount of outstanding currency swaps by 30 percent before
investors get worried about the stock of these derivatives.
"There are always risks if they increase their exposure (to
swaps) but I don't think it reached levels that are concerning
the officials at this point," she said.
(Reporting by Walter Brandimarte; Editing by Steve Orlofsky)