Brazil’s central bank on Tuesday surprised financial markets by holding its first currency swap auction in almost two years and has planned another for Wednesday.

On Tuesday the central bank sold contracts worth $400m. Analysts said the central bank had been expected to sell the swaps – a proxy for selling dollars – if the real continued to fall, but not to step in as early as it did.

One possible explanation is the expiration of currency futures contracts on Wednesday. Investors with short positions in real futures might have tried to push the real down against the dollar and the central bank might have acted to reduce the consequent volatility.

It is more likely that the central bank was clearing the ground for a reasonably large cut in interest rates on Wednesday. The monetary policy committee, or Copom, is expected to announce a cut of at least 50 basis points in the target overnight rate from the current level of 15.75 per cent.

“A very weak real could put it in the position of either not being able to cut interest rates or, if it did cut them, of weakening its credibility,” said Ricardo Amorim of WestLB in New York.

On Tuesday the real veered between a peak of 2.276 to the dollar before sliding to 2.3625, a drop of 3.6 per cent. It made similar highs and lows again before settling at 2.31 as local markets closed. Currency volatility has been rising generally, but it has spiked sharply in Brazil. Last week it hit its highest level since 2003 at 34 per cent, based on the implied volatility in one-month currency options. On Tuesday it subsided to 23 per cent, but climbed again to 27 per cent.

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