Long dollar positions against the Brazilian currency in the derivatives market drop to $58.3 billion from $77.6 billion
01/29/2025
Foreign investors have reduced their bets on a stronger dollar against the Brazilian real by $19.3 billion in the derivatives market since the peak of these positions, reached in the first days of the Central Bank’s intervention in the spot market on December 16, 2024.
Several factors have contributed to this sharp reduction over the past 40 days. In addition to the monetary authority’s intervention, currency fund managers cited a more measured stance from U.S. President Donald Trump on trade tariffs, expectations of a higher Selic benchmark rate, and the lack of new fiscal developments in Brazil.
Between December 16 and the latest data released by B3 stock exchange on Monday (27), net long dollar positions fell from $77.6 billion to $58.3 billion, according to figures covering mini-dollar contracts, dollar futures, swaps, and foreign exchange coupon contracts (DDI).
A long position in the dollar reflects both current market movements and future expectations. The unwinding of futures market positions helps explain the recent depreciation of the dollar, as the Brazilian futures market has greater liquidity than the spot market. It also signals that fewer investors are willing to hold dollars for future exchange, possibly anticipating a further decline in the U.S. currency against the real or seeing limited upside potential for the dollar. Over the period of this position reduction, the exchange rate per U.S. dollar in the spot market fell from R$6.09 to R$5.91, marking a 3% depreciation of the U.S. currency against the real.
Dollar sell-off
For Ronny Kim Woo, a multi-asset manager at ARX Investimentos, the unwinding of dollar positions is closely linked to international developments.
“It’s important to look back at the last quarter of last year. In October, as betting markets increased the odds of a Trump victory, investors began positioning for a Trump trade—buying the dollar against all currencies, not just in developed markets but especially in emerging markets,” he explained.
In October, as Mr. Trump’s chances of winning the White House grew—along with expectations of a Republican majority in both houses of Congress—the exchange rate per dollar appreciated 6.14%, climbing from around R$5.44 to R$5.78. Over the same period, the DXY index, which tracks the dollar against a basket of major currencies, gained 3.1%.
“The market started pricing in the election outcome ahead of time. Around the same time, expectations for Federal Reserve rate cuts also began to shift,” Mr. Woo noted.
Domestically, a weak fiscal package announcement in late November, coupled with the government’s proposal to exempt income tax on salaries up to R$5,000, led foreign investors to increase their dollar positions against the real.
Until mid-November, after Mr. Trump’s election victory, the real had been one of the best-performing currencies against the dollar. Market participants had anticipated that the government’s fiscal package might support the Brazilian currency, prompting investors to avoid shorting the real. Additionally, there was an expectation that Mr. Trump’s policies would only indirectly affect Brazil. However, this view shifted after details of the fiscal measures emerged, leading to a sharp deterioration in the real’s performance, according to Mr. Woo of ARX.
Turning point
By mid-December, as long dollar positions began to unwind, Brazil’s Central Bank tightened monetary policy, signaling two additional 100 basis-point hikes in the Selic rate in upcoming meetings—a highly conservative stance. Around the same time, the Central Bank began intervening directly in the spot market.
“With this intervention [which drove the dollar lower], foreign investors saw an opportunity to lock in profits from the positions they had built since October,” Mr. Woo.
Hedging strategies also played a role. Investors with long dollar futures positions incur the Selic rate while earning the foreign exchange coupon rate. In December, two factors made these positions less appealing: the Central Bank raised the Selic rate and signaled further hikes, while its interventions in the spot and swap markets pushed down the foreign exchange coupon rate.
As a result, holding long dollar positions became more expensive. While these factors alone may not fully explain the unwinding of positions, traders say that, combined with profit-taking and a calmer global outlook, they became a reason for caution.
“Betting structurally against the real right now is risky and could be very costly. The widening interest rate differential [between Brazil and the U.S.] undermines this strategy over the long run,” said Rodrigo Cabraitz, a currency trader at Principal Claritas.
He expects that future bets against the real will be more tactical, with shorter stop-loss levels to limit downside risk.
“To take a long-term bearish stance against the real, we would need more negative domestic news. So far, we’ve had a quiet month with no major developments impacting the market,” he added.
Mr. Cabraitz also noted that the first quarter typically sees a seasonal inflow of dollars into Brazil due to grain exports, which could provide additional support for the real.
“This marginally positive inflow scenario, combined with the interest rate differential, discourages long dollar positions. Unless new negative news emerges, the fundamentals of the real make it harder to bet against the Brazilian currency,” he explained.
Another factor driving the shift in dollar positions is the preference for relative trades among emerging market currencies.
“If we look at the most liquid currencies in the region—the Brazilian real, Mexican peso, Chilean peso, and Colombian peso—the real stands out, ” Mr. Cabraitz said.
“With low volatility due to a lack of fresh local developments and external factors weighing more heavily on peer markets”, the real is positioned to outperform other Latin American currencies, he added.
*By Arthur Cagliari — São Paulo
Source: Valor International