Reduction of Exchange Rate Liabilities through Swaps: A Necessary Strategy for the Central Bank of Brazil in the Current Scenario

The Central Bank of Brazil (BCB) faces significant challenges in 2025, with the deterioration of external accounts and exchange rate volatility. In this context, reducing exchange rate liabilities by decreasing the stock of currency swaps emerges as a relevant strategy to mitigate financial risks and strengthen international reserves.

Current Situation of External Accounts

In March 2025, Brazil recorded a record deficit in its external accounts, reflecting a less favorable position to absorb external shocks. This deterioration could affect the exchange rate, especially given more restrictive trade policies adopted by key trading partners, such as the United States.

Additionally, Brazil's economy reported a current account deficit of US$ 6.5 billion in September 2024, a significant deterioration compared to the same month of the previous year. This scenario indicates a trend of increasing current account deficits, which could further pressure the exchange rate.

Currency Swaps and the Central Bank's Liabilities

Currency swaps are instruments used by the BCB to provide protection to the market against exchange rate volatility, offering hedging to economic agents. However, maintaining a high stock of these instruments represents a significant liability for the Central Bank, especially during periods of depreciation of the real, which could result in substantial financial losses.

Discussion on Reducing the Stock of Currency Swaps

Recently, the financial market has been discussing the possibility of the BCB reducing its stock of currency swaps. This strategy aims to mitigate negative externalities in the market, such as pressure on the currency coupon (interest rate in dollars). Gradually reducing this liability could decrease the financial risks associated with exchange rate fluctuations and improve the perception of the solidity of international reserves.

In light of the deterioration of external accounts and the risks associated with exchange rate volatility, reducing exchange rate liabilities through a decrease in the stock of currency swaps presents itself as a prudent strategy for the Central Bank of Brazil. This measure could contribute to financial stability, reinforce international reserves, and mitigate potential losses from adverse exchange rate fluctuations.