(Adds comments by central bank official, financial details)
BRASILIA, Nov 18 (Reuters) - Brazil’s central bank will intervene in the foreign exchange market if the market is unable to absorb the “large” outflow of reais expected by the end of the year as local banks unwind their so-called overhedge position, the bank’s monetary policy director, Bruno Serra, said on Wednesday.
Speaking in a live online event hosted by Valor Economico newspaper, Serra said this should come as no surprise, as the central bank acts to ensure the market functions smoothly, irrespective of the nominal exchange rate.
“The central bank has never denied that this volume of approximately $15 billion ... is very large. There is a risk that the market may not have the capacity, the depth, to digest it,” Serra said.
“Our duty at the central bank is to ensure the market functions smoothly. If we think the market is unable to digest this volume, that it is affecting the functioning of the market ... (we) will act. This is normal, it is no surprise,” he said.
Brazilian banks are set to unwind half of their so-called overhedge trades put on to protect their FX exposure on overseas equity investments by Dec. 31 for tax purposes.
Serra said this total exposure stands at just under $30 billion, half of which is to be unwound by the end of the year. It was around $50 billion earlier this year.
Brazil’s real has slumped around 30% against the dollar this year, making it one of the world’s worst-performing currencies against the greenback and prompting the central bank to sell billions of dollars in the spot and derivatives markets to slow the slide.
Central bank economic policy director Fabio Kanczuk had his knuckles rapped last week after he said the bank will help the market absorb the anticipated overhedge flow. The central bank issued a statement shortly after, saying it never flags intervention intentions in advance.
Serra said the FX market is less liquid now than before the COVID-19 pandemic struck, and that although volatility has declined recently as overseas players have returned to the market, it is still higher than policymakers would like.
Once uncertainty surrounding the overhedge flow has passed, currency market volatility should ease back further, Serra said. (Reporting by Jamie McGeever and Isabel Versiani in Brasilia Editing by Matthew Lewis)
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