Brazil has reduced a financial transactions tax on currency derivatives
to zero after its currency, the real, hit four-year lows against the
dollar on Wednesday.
The measure was the second such move in a
week to dismantle currency controls as the government sounds a rapid
retreat from its earlier “currency war” against foreign capital inflows.
The
1 per cent tax, which applied to short dollar positions in the futures
market that were essentially a bet on a stronger real, was considered
one of the most onerous of Brazil’s currency controls when it was
introduced in July 2011.
“This was the measure that created all
kinds of distortions in the market, generated big losses in people’s
portfolios, reduced liquidity and really caused inflows to suddenly
stop,” said Tony Volpon, Nomura economist.
The government’s
removal of the tax reflects increased concern that expectations that the
US Federal Reserve will begin tapering off liquidity, combined with
weakness in the Brazilian economy, are driving the country’s once mighty
currency to new lows.
The real was trading at R$2.1564 against
the dollar on Wednesday, a depreciation of 1.1 per cent compared with
the previous day’s close.
The continued weakness in the currency
has come despite a move by the government last week to remove another
key currency control dating from 2010 by lowering to zero from 6 per
cent a financial transactions tax on foreign buying of domestic bonds.
The
currency controls were designed to prevent the real appreciating so
much that domestic industry would be rendered uncompetitive.
But
the removal of the controls has yet to result in a stronger currency,
with the central bank forced to intervene in swap markets in recent days
to smooth out the volatility in the exchange rate and keep the real
from depreciating too quickly.
“It doesn’t make sense to maintain
this obstacle,” said finance minister Guido Mantega on Wednesday of the
removal of the derivatives tax. “With this there will be a greater
offer of dollars in the futures market and a reduction in the
depreciation of the real.”
The reduction to zero “is very good
news but it is unfortunate that there is still the possibility that they
will bring it back at some point”, said Nomura’s Mr Volpon.
While
the tax reduction will probably have an impact on the market, its
effect on the real’s depreciation may be limited, he said.
“We
live in a very different moment in terms of global liquidity so there is
no one measure that is going to turn this thing round,” he said.
http://www.ft.com/cms/s/0/26e10e36-d3ba-11e2-95d4-00144feab7de.html#ixzz2W70wZ4Mo
Thursday, June 13, 2013
Brazil Reduces IOF on Financial Derivatives » More Liquidity in the Market
Labels:
BRL Currency,
Currency War,
IOF,
waldemarjezler