Brazil central bank pauses interventions as Trump win boosts volatility

November 9, 2016 1:08 PM EST

A view of Brazil's Central Bank in Brasilia, Brazil, September 15, 2016. REUTERS/Adriano Machado


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By Bruno Federowski

SAO PAULO (Reuters) - Brazil's central bank will not hold any reverse currency swap auctions for a second day on Thursday after performing them almost daily since late last year, it said in a statement.

The bank said it will pause its daily auctions of reverse currency swaps, which function like dollar purchases by investors for future delivery, for at least Thursday to assess "current market conditions."

The move comes after U.S. President-elect Donald Trump's surprise victory sent global financial markets into a tailspin overnight and slammed Brazil's real currency as investors worried that his erratic campaign pledges would trigger months of policy uncertainty.

The pause in the auctions marks a setback to the central bank's year-old plan to unload its costly exposure to traditional currency swaps, equivalent to future dollar sales, after years of meddling left it holding more than $100 billion in foreign currency-linked derivatives late last year.

Earlier on Thursday, Reuters reported that traders speculated the central bank could slow the reduction of traditional swaps if market remained volatile.

Before local markets opened, Brazil's central bank announced it was cancelling an auction of $250 million worth of reverse currency swaps for Wednesday.

Central bank Governor Ilan Goldfajn said the bank was monitoring global markets and would take "adequate measures." He declined to comment directly on the U.S. election.

The central bank resorted to selling reverse currency swaps in late 2015 as expectations of leftist President Dilma Rousseff's impeachment triggered a rally in the real.

That allowed it to reduce the balance of traditional swaps to $24 billion by Wednesday's close.

Even without central bank intervention on Wednesday, the real weakened as much as 2.5 percent to nearly 3.25 per U.S. dollar .

"The central bank is signaling that the pace of intervention from now on will depend on whether volatility dies down," said Roberto Campos, who manages 1.3 billion reais as a partner at São Paulo-based Absolute Investimentos.

Should swings in the real continue, traders said the central bank could struggle to resume sales of reverse swaps.

Additional volatility is far from certain.

Traders pointed to Trump's conciliatory acceptance speech as a sign that aggressive campaign rhetoric could give way to more constructive policymaking. That helped the real fight back to close at 3.21 to the dollar.

Even if Trump enacts protectionist policies, some analysts believe the impact in Brazil will be limited.

"My base case scenario is that today was a one-off event," Cristiano Oliveira, chief economist at Banco Fibra, said.

(Reporting by Bruno Federowski; Writing by Brad Haynes; Editing by Daniel Flynn and Alan Crosby)



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