You Shouldn’t Miss The Cupom

I actually wanted to focus on this on Wednesday but confirmation wasn’t forthcoming until yesterday. So, it ended up being a broader note on the dollar which only included some mention of Brazil in passing. Still a worthwhile couple of minutes.

There were rumors that Banco (central) do Brasil was intervening or was going to intervene in its local currency markets, which may be an important signal. More of swaps that aren’t really currency swaps (which you can read about here). In lieu of reading the whole thing, here’s a brief summary:

The Banco’s “swaps”, then, act only on implied future dollar rates, increasing the cupom cambial (the onshore dollar rate implied by currency futures and spreads with dollar rates). In other words, since the central bank “swap” reduces the futures price of dollars in relative comparison to the spot price, there is a greater incentive for banks (both Brazilian and foreign) to borrow US dollars on foreign markets and import them to take advantage of the cupom cambial spread. The swap isn’t really a swap in the conventional sense since the central bank is only swapping dollar indexed securities – deliverable in reals. In short, it is the old central bank axiom of getting the “market” to do your dirty work for you.

It has since been confirmed that the central bank sold 20,000 contracts for a small notional $1 billion in today’s trading, not yesterday’s. The dollar amount isn’t the matter, more symbolism than anything particular with where things stand in Brazil.

My intent in only mentioning this last night was to raise a poignant issue, to ask the question, why now?

As for Brazil, the real is within spitting distance of a record low even though its central bank has promised the economy is and will be booming (sounds vaguely familiar) and that it can control the currency if it so chose. Which only raises the question of what they might be waiting for…If you are the head of Banco do Brasil and the entirety of US officialdom keeps telling you the dollar’s going lower, that everyone wants the dollar to go lower, you tend to listen.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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