Brazil Central Banker Makes Striking Admission: FX Interventions Are "Unsustainable"

In the aftermath of the May 2013 Taper Tantrum, when the sudden spike in US interest rates and the rapid rise in the dollar prompted many Emerging Market nations to scramble to avoid a panic capital outflow while at the same time keeping their currency stable, the Brazil Central Bank unveiled a clever solution to intervening in the FX market without being held to immediate account by the market, and by the amount of its FX reserves.

Unlike other central banks which mostly employed sterilised interventions, the BCB implemented the largest intervention program of any emerging market not by selling US dollars to buy Brazilian reals but by selling tens of billions in synthetic US dollars in the form of FX forwards. These FX forwards, or swaps as they are called in Brazil, are different from commonly traded currency forwards because they are not settled in US dollars but in Brazilian reals (BRL).

More importantly, this unsterilized method of intervention allowed the BCB to aggressively step into the FX market synthetically, and without explicit reserve constraints, as the swaps were merely contracts to be settled at some future date.

There were negative aspects, however, too, because as these swaps accumulate, at some point they have to be settled in underlying securities, which in the case of an activist central bank which is engaging in increasingly more intervention, the market may start suspecting is untenable.

Well, as we documented two weeks ago, that's precisely what has been going on in Brazil, whose currency plunged as low as 3.93 against the dollar, before consecutive rounds of swap-based interventions limited the loss, although even then the stabilization was tenuous at best. 

As a reminder, this is how we documented the BCB's torrid interventions back on June 7:

Having swapped almost $3 billion to buy reals, the second major intervention in a week by the Brazilian Central Bank has utterly failed again...

The market clearly has its eye on Brazil as after intervening 'successfully' selling its 40,000 FX swaps, the Real is fading back to the lows of the day - in other words: intervention failure #2 for the week...


The good news for the Brazilian Central Bank was that these ongoing interventions managed to stabilize the Brazilian real last week, when the BCB unveiled as much as $10BN in weekly swaps to spook the shorts and halt the capital flight, which succeeded in sending the USDBRL back to 3.70, and stabilizing the BRL in the 3.70-3.80 range.

There was just one problem: as we reminded the market last week, these massive swap interventions would have to be settled at some point, and only then would it emerge just how naked the Brazilian FX reserve emperor truly is.

Just 4 days later, it was none other than Brazil itself which confirmed our warning, because as Bloomberg reports on Monday afternoon, citing an unnamed central bank official with direct knowledge of issue, that the volume of currency swaps the Brazilian central bank is currently offering to reduce volatility is not sustainable through the Oct. general election.

What the above statement means that, as we warned, if and when these swaps are settled into USD, there may simply not be enough USD to satisfy claims, in other words, the central bank may find itself USD insolvent.

Confirming as much, Bloomberg continues that maintaining the pace of currency swap sales would mean the stock would exceed the amount Brazil has in its international reserves.

The good news is that for now, the swap offers have so far been successful in reducing FX volatility, with the BCB official adding that the BCB is ready to use international reserves in FX market if necessary.

But the real message is that should the central bank be forced to maintain intervention at the current pace, it will simply run out of dollars, if only later rather than sooner, courtesy of the unsterilized FX intervention, which is growing at an exponential pace as the following chart shows.

Bloomberg further notes that the BCB was surprised by the degree of FX volatility starting in May with truckers’ strike, and adds that concern over the October election is weighing on FX market, citing the unnamed official.

In official response to this shocking admission that its intervention is on the road to failure, albeit by an unnamed central bank official, the central bank said it does not recognize "off-the-record" statements, especially by supposedly "high-ranking central bank sources." Alas, it may be too late, and if the market start asking questions about just how much reserves are already pledged to "make whole" swaps, then all hell may be about to break loose for Latin America's biggest economy, and one of the world's biggest Emerging Markets.

For now, most FX traders appears to have missed the warning, although the real did weaken with the Real dropping from 3.74 to just under 3.76 in response to the stunning admission.


Captain Nemo d… Mon, 06/18/2018 - 15:56 Permalink

If you document it a little more, all Brazilians will become documented aliens.

Maybe they knew it was a short term solution (as the unnamed official stated) and wanted to use it for short-term stability without sustaining it forever? Financial innovation and stuff.

Escrava Isaura shovelhead Mon, 06/18/2018 - 16:21 Permalink


Capitalism for Dummies.....Pardon me, conservatives.


Never let your debts point outside your legal system. 


The Weimar inflation was due to Triangular flow where credit issued was dollars from Wall Street against German Muni Bonds primarily.


The credit flowed to municipalities, then ultimately to German central bank.  From there it went to pay reparations for Versailles treaty.  These dollars then cycled out of Germany and into France/Britain for reparations and from there to the U.S. Treasury.  France and England were in dollar debt bondage to the U.S.


Debts then grow with Usury at Wall Street Banks, to ultimately fund the U.S. Treasury.  This put exchange rate pressure on Germany.  Credit dollars sourced in Wall Street and found their way to the treasury.


Private banks in Germany then started hypothecating new deutschmarks against dollars collateral as loans to short the Mark.  This positive feedback mechanism created yet more shorts leading to a break into hyperinflation as more and more marks were hypothecated into existence.  Exchange rate pressures can cause bear raids of this type, where finance busts out sovereign country.  It is non trivial as people commit suicide.


Never let your debts point outside your legal system.  At its most fundamental, money is a division of the law.  Why cannot economists understand this?  Why?  They are bought and paid for.


Today, debts are canceled with mark to markets.  Or, debts are canceled with bankruptcy.  Private debts can be countered with Deficit spending from government - hence Keynesianism.


China cancels debts all the time because they have state banks - and this is the key reason why China will always beat the U.S. and the world.  By canceling debts they effectively let their former credit float free - so it begins to act like a Greenback generating non usurious efficiencies in the marketplace.  Initially, the credit loans from Chinese state banks are channeled into production .... that is stealing American Industry with Wall Street’s help. MEFOBILLS


In reply to by shovelhead

booboo Escrava Isaura Mon, 06/18/2018 - 17:16 Permalink

Mmm yea, what ever. You keep clinging to a statist solution when you are sitting in a pile of statist produced horses shit and you wonder why people think you are a blubbering idiot. Holy crap man, get the fuck away from your beret wearing prog fag clique. Besides, you want to borrow another mans stored labor in the form of a loan expect to pay the vig. I’m all on board with the fiat ponzi shit but your solution is still having one of the ponzi partners run the game and that is a non starter. Get it out of your head that .gov has the answer

In reply to by Escrava Isaura

Escrava Isaura booboo Mon, 06/18/2018 - 18:20 Permalink

Besides, you want to borrow another mans stored labor……

Not me, but I’ll give you an example of one that does.

How Trump’s Casino Bankruptcies Screwed His Workers out of Millions in Retirement Savings

Trump’s company encouraged its employees to invest their retirement savings in company stock……..


Former casino worker at Trump Plaza who asked not to be named. “Honestly. I thought, way back when, the guy was way brighter than we were. He was running the company and we were working for him. We thought he was brilliant. When we invested in it, we thought, how could this stock go so low?”


By the end of 1997, employees had used more than $2 million in retirement funds to purchase 218,394 shares. The number of shares in employees’ retirement accounts rose steadily even as the price dropped. By late 2003, the pool of employee retirement accounts held 1.1 million shares of Trump stock.


…..when the employees were forced to sell their shares……an employee who’d put $1,000 into her retirement account in 1997 when shares averaged $9.65 apiece, those savings had now withered to just $59.


In reply to by booboo

NEOSERF Mon, 06/18/2018 - 16:11 Permalink

Its probably nothing...I'm sure the Fed will step in and help but I hope Trump is already thinking about what piece of Brazil the US would like to annex as part of the bailout

shortonoil Mon, 06/18/2018 - 16:17 Permalink

Another EM economy down the drain. Higher interest rates, and sky high oil prices are sucking them dry in 

quick succession. This could give the West another two years before its bottom falls out.

romario Mon, 06/18/2018 - 16:48 Permalink

tbh they do earn interest by being short U$D on the swaps... so if it remains stable, they win. The Brazilian Central Bank has already won and lost in the past years through swaps... but it's indeed a bit freightening this whole story that U$400 billion in reserves could be depleted... also mostly these swaps are one month duration, time in which the world usually does not end...