Brazil's Central Bank Says It May Partially Unwind Swaps Program

Brazil’s central bank said it sees room to partially unwind a program aimed at boosting the real, prompting the currency to pare gains.

Policy makers see the international economic environment creating an opportunity to unwind part of its foreign Exchange Exchange An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv Read this Term Swaps Swaps Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of Swaps Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of Swaps Read this Term program by reducing its daily rollovers, the central bank press office told reporters on Thursday by telephone.

The central bank has used the sale of foreign exchange swap contracts, which are equivalent to selling dollars in the futures market, as a hedging instrument for local investors and companies against a sharp devaluation of Brazil’s currency. Even as Brazil’s economy faces shrinking activity and above-target inflation, the real has surged the most this year among a list of 31 major currencies tracked by Bloomberg on speculation that President Dilma Rousseff may be impeached.

"The central bank is recognizing the increasing probability of an impeachment happening," said Leonardo Monoli, a partner at Jive Asset Gestao de Recursos in Sao Paulo, said by phone. "Many international investors could return to the country, while companies could unwind hedging strategies once Rousseff is out of the position, and that would certainly support the real."

The real gained 2.5 percent to 3.6497 per U.S. dollar at 3:09 p.m. local time after rising as much as 3.7 percent earlier in the day. The currency has gained 8.6 percent this year, according to data compiled by Bloomberg.

The central bank started the intervention program in 2013 after the real hit almost a five-year low at that time. Since March 2015, it has been rolling over the contracts maturing each month, offering to extend up to 100 percent of the contracts maturing in January and February.

--With assistance from Ney Hayashi To contact the reporters on this story: Filipe Pacheco in Sao Paulo at fpacheco4@bloomberg.net, Arnaldo Galvao in Brasilia Newsroom at agalvao1@bloomberg.net, Marisa Castellani in Sao Paulo at mcastellani7@bloomberg.net. To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net, Matthew Malinowski

By: Filipe Pacheco, Arnaldo Galvao and Marisa Castellani

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