Brazil’s currency, the real, is up 5% since the end of June in dollar terms. It has increased 100% since 2003, which is a larger move than the Japanese yen made over the period. The real could be the world’s most overvalued major currency according to Goldman Sachs via Reuters.
Japan recently capitulated and intervened in the currency market. Brazil is capitulating as well, stepping up its actions to weaken the value of the real and prop up the U.S. dollar.
Last Wednesday the central bank began having two auctions daily, buying more dollars each time, and on Thursday bought more dollars than it bought over the course of February.
Traders now believe the next step would be to call three auctions on one day and then proceed to so-called “reverse swap” auctions, a form of derivative which would have the same effect as buying dollars in the futures market.
If the real weakens much more, the central bank could “shift its policy somewhat, perhaps calling three (auctions) or even more,” said Mario Battistel, the head of currency trading at Fair Corretora brokerage in Sao Paulo.
There are other options as well:
“If it doesn’t manage to control the real by buying directly on the spot market, the bank will go into the futures market and do reverse swaps,” Battistel said.
Brazil’s main newspaper, O Estado de S. Paulo, reported early on Friday that a government source said the bank could call a series of surprise daily auctions.
Below is a chart of the real, so far intervention hasn’t been working.