Brazil: Selected Issues

IMF Staff Country Reports, July 23, 2019

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Brazil: Selected Issues

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Bibliographic details

• Published: July 23, 2019
• Series: IMF Staff Country Reports
• DOI: https://doi.org/10.5089/9781513508375.002

Overview and purpose

• Examines the profitability of foreign exchange (FX) swaps issued by the Central Bank of Brazil (BCB) between May 2013 and February 2019 to shed light on the rationale for FX intervention.
• Uses interest rate and exchange rate forecasts to evaluate expected and realized returns on FX swaps.

Key findings

• FX swaps have been profitable in expectation, based on available interest rate and exchange rate forecasts.
• Actual returns were negative due to unexpected exchange rate depreciations.
• The scale of FX intervention is correlated with the expected profitability of the swaps, suggesting the BCB used FX intervention to stem abnormal movements of the exchange rate.
• The analysis suggests the BCB used FX intervention to lean against temporary excessive movements of the exchange rate.
• The expected profitability of FX swaps can be monitored in real time and may provide guidance on the appropriate level of intervention.

Policy implications and recommendations

• Monitor expected profitability of FX swaps in real time as an operational indicator to guide the magnitude and timing of FX intervention.
• Use expected-return metrics to assess whether interventions are aimed at stemming abnormal or temporary exchange rate movements rather than pursuing long-term profit.

Content in this bundle

• Brazil: Selected_Issues; IMF Country Report No. 19/243
  • Brazil: Selected_Issues; IMF Country Report No. 19/243 (Markdown version)
  • Brazil: Selected_Issues; IMF Country Report No. 19/243 (PDF)