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By Guillermo Parra-Bernal and Bruno Federowski
SAO PAULO, March 18 (Reuters) - Brazil’s central bank plans to auction up to $1 billion worth of reverse currency swaps on Monday, in an indication that policymakers are uneasy with recent gains in the real that could worsen the magnitude of the nation’s harshest recession in decades.
Officials at the central bank began consulting foreign currency traders on whether there was any demand for reverse currency swaps in an auction, according to four traders with direct knowledge of the situation. The auction of reverse swaps is the first in three years, according to Thomson Reuters data.
Reverse currency swaps are instruments through which the central bank can weaken the real, and are an equivalent to buying U.S. dollars in the futures market. The auction of 20,000 contracts was set for Monday between 11:10 a.m. and 11:20 a.m. (1410 GMT and 1420 GMT), the central bank said.
Results will be unveiled 10 minutes later, the bank added.
The step is the latest in a series of central bank actions to choke the real’s sudden gains. Policymakers said they will reduce the rollover of about $110 billion in currency swaps the bank currently has.
The real has gained about 8 percent since Feb. 25, on hopes that a change in government could lay the groundwork for an economic recovery. The real has also been lifted by the U.S. Federal Reserve’s forecast of a softer path of interest-rate hikes in the world’s largest economy.
Futures on the Brazilian real erased gains after the central bank began to sound traders on the reverse swap auction. (Additional reporting by Flavia Bohone; Editing by Chris Reese and Sandra Maler)