Currency Wars Continue But Big Guns Yet To Be Seen

By Win Thin

Brazilian Finance Minister Guido Mantega announced new FX measures at his press conference, but at first blush are quite underwhelming. The 6% IOF tax on local entities was extended for overseas loans with maturities up to 2 years, up from 1 year previously. Earlier today, we highlighted possible measures that included:

1. further increases to the IOF rate;
2. more stringent limits on USD/BRL positions by local banks;
3. taxing external corporate bond/loans with maturities longer than 360 days;
4. announcing USD purchases by the sovereign wealth fund; and
5. increasing the tax on foreign purchases of local stocks (we find this one very unlikely).

Mantega for now has chosen option 3 but is clearly leaving open the possibility of using the others by warning that more drastic measures are possible in the future. He added that BRL would most likely be trading around 1.50 without the FX measures taken. We disagree – it would probably be closer to 1.40. So in that sense, the measures have been successful in slowing the move. With all the inflows into Brazil, we feel (and we also think the Brazilian policy-makers know this) that it is virtually impossible to stem the rally. BRL is likely to retest the 1.60 level with an eye towards the August 2008 low around 1.55, but we would exercise some caution near 1.60 as other, more stringent measures are no doubt waiting in the wings.

One last thing to think about. It is quite striking that on the same day that Portugal holds a press conference announcing an EFSF aid request because investors are shunning Portugal, Brazil holds one announcing measures to help slow BRL appreciation because too many investors are pouring money into Brazil. How the worm has turned.