Brazil sovereign wealth fund another tool of currency management

Brazil will allow its sovereign wealth to trade currency derivatives which will further the tools available to the government to stop the real appreciation. Remember that Brazil was the country which coined the phrase "currency wars" to describe the current environment in the FX markets. The trading of currency derivatives could allow for intervention through reverse currency swaps by buying dollars and selling real.

The central bank last offered reverse currency swaps, a contract equivalent to buying dollars in the futures market, in May 5, 2009, helping spark a 1 percent slide in the real that day. Under these contracts, the central bank pays investors the Brazilian overnight interbank rate, now at 10.75 percent, in reals and receives a fixed interest rate in dollars.

How or when exactly currency derivatives will be used to stabilize the real is unclear, but a normal course of action is to punish speculators at times when the government can have the maximum impact on rates. The central bank on Jan. 6 also set reserve requirements on short dollar positions held by local banks. Finance Minister Mantega wants to stop the dollar from, as he put it, "melting". He is sure "the real will not strengthen".