Last month, monetary authority sold $21.57bn in the spot market to counter a record $26.41bn outflow
01/09/2025
The Central Bank of Brazil carried out its largest monthly intervention in the spot dollar market in December 2024, marking the most significant activity since the country adopted the floating exchange rate in 1999. The monetary authority sold $21.57 billion in the spot market last month, a record intervention driven by a historic dollar outflow of $26.41 billion, according to monthly currency flow data dating back to 1982.
“December is always a challenging month. However, the outflow in 2024 was significantly stronger, heavily concentrated in the financial account,” explained Sérgio Goldenstein, chief strategist at Warren Investimentos and former head of the Central Bank’s Open Market Department (DEMAB). “It made sense for the Central Bank to intervene in the spot market rather than through swaps because the pressure was concentrated precisely in the spot market, given the volume of physical dollar outflows.”
Until November, Brazil’s currency flow remained in positive territory, buoyed by strong commercial account results that more than compensated for financial outflows. However, this trend reversed sharply in December, a month typically marked by substantial dollar outflows for profit and dividend remittances. In October, Valor had already highlighted that financial account outflows were heading for a record high in 2024.
Over the year as a whole, Brazil posted a total net outflow of $18.01 billion. The commercial account contributed positively with an inflow of $69.2 billion, but this was outweighed by the financial account’s outflow of $87.21 billion.
Faced with December’s unusually high outflows, the Central Bank engaged in unprecedented foreign exchange market activity. In November, it conducted line auctions (dollar sales with a repurchase commitment), a tool traditionally used at year-end to address specific demands. However, the monetary authority also opted to sell reserves in the spot market to alleviate the impact of accelerating financial outflows.
The decision to auction dollar sales in the spot market was driven by the rapid deterioration of exchange rate levels. This was partially attributed to heightened fiscal risk perceptions following disappointment with the federal government’s spending review package, as well as increased global risks. The Central Bank’s focus on reserve sales was also influenced by unhedged dollar outflows—dollar movements without the purchase of future contracts.
“Throughout the month, we observed that some outflows were unhedged, which was crucial in the real’s depreciation movement. As the Brazilian currency experienced a rapid devaluation, driven by increased risk premiums, I believe this devaluation was decisive for the Central Bank to intervene more effectively in the exchange market through spot auctions,” Mr. Goldenstein noted.
Throughout 2024, the Central Bank maintained a strategy of targeted foreign exchange interventions. For instance, in April, it used currency swap contracts to manage the maturity of NTN-A bonds, while in August and early September, it conducted both swaps and spot auctions to address the rebalancing of the EWZ index fund, the top ETF for Brazilian stocks in New York. By contrast, in 2023, the monetary authority made no extraordinary interventions.
Central Bank’s approach
Pramol Dhawan, head of emerging market portfolio management at Pimco, which oversees approximately $2 trillion, believes Brazil’s current currency intervention program is largely reactive and needs a structured approach, as it may not effectively address current economic challenges. “In contrast, central banks like those of Peru and Turkey, with floating exchange rate systems, have clearer guidance for intervention, leading to better outcomes through greater transparency,” he said.
Historical data compiled by Valor shows that the Central Bank’s actions have closely tracked the currency flow since 1999. During periods of strong dollar inflows, the bank typically intervened through purchases, while outflows led to dollar sales. However, this trend was partially broken in 2023, when the Central Bank refrained from purchasing dollars despite a positive currency flow.
Although critical of the Central Bank’s current intervention approach, Mr. Dhawan recognizes the complexities of the current environment. “Political factors, including skepticism about fiscal policy and the early onset of the 2026 political cycle, cast doubt on the appropriateness of the Central Bank’s actions. With ample market liquidity and no clear signs of dysfunction, the necessity of such interventions is debatable,” he added.
In December, during a press conference on the Inflation Report, then Central Bank Chair Roberto Campos Neto said the monetary authority should intervene whenever it detects signs of dysfunction in the exchange rate. While December typically sees significant capital outflows, the record level in 2024 was particularly striking, exceeding the second-largest December outflow on record—from 2019—by 50%.
The Central Bank identified several factors contributing to the negative flow, including larger dividend payments by companies with strong earnings and increased investments by Brazilians abroad. “We began to see a greater outflow [of capital coming] from individual investors more recently, through [digital] platforms with smaller transactions,” Mr. Campos Neto said.
Roberto Lee, CEO and co-founder of Avenue, a brokerage allowing Brazilians to invest abroad, noted a marked rise in outflows during the last quarter of 2024. “The profile shifted towards more conservative investors seeking fixed income and liquidity. This was a sentiment we didn’t observe earlier in the year when expectations for Brazil were higher,” he observed.
Mr. Lee emphasized that while this shift was not comparable in scale to corporate outflows, it was a trend mirrored across emerging markets. “This is not a new sentiment. In the past, there have been instances when Brazilians adopted a more conservative stance. The difference now lies in the relatively recent infrastructure [of digital platforms], which has been around for roughly five years. Previously, these investors would turn to the CDI [Interbank Deposit Certificate]. Now, they have the option to choose safer assets. For a ‘flight to quality’, you first need an airplane ticket.”
Mr. Goldenstein added that the outflows may also have included a reversal of foreign investor inflows seen earlier in the year. “From July to November, foreign investors increased their portfolio allocation in domestic debt. We will need to wait for December’s data to confirm, but it is likely that a ‘stop-loss’ movement and reduced allocations occurred throughout much of the second half,” he suggested.
December also witnessed heightened stress in the domestic interest rate and public bond markets. Long-term rates spiked, triggering stop-loss movements among foreign investors, particularly in long-term fixed-rate bonds. This prompted the National Treasury to step in with public bond buybacks to stabilize the market.
*By Arthur Cagliari — São Paulo
Source: Valor International