Brazilian Real Slides as Government Taxes Currency Derivatives

Brazilian Real Slides
Brazil’s real tumbled after the government said it will levy a tax on some investments in foreign-exchange derivatives, the latest step in a bid to stem the currency’s rally. Photographer: Adriano Machado/Bloomberg

Brazil’s real declined by the most in more than a month after the government said it will levy a tax on some investments in foreign-exchange derivatives, the latest step in a bid to stem the currency’s rally.

The real dropped 1.1 percent to 1.5556 per dollar, the biggest decline since May 11, from 1.5391 yesterday. It earlier fell as much as 2 percent to 1.5704 per dollar, the largest drop since June 2010.

Brazil took further action to end a rally in the real after efforts to weaken the currency this year failed to prevent it from reaching a 12-year high against the dollar yesterday. The real tumbled after Brazil authorized the monetary council to charge a 1 percent tax on certain derivatives operations and to raise taxes on futures operations.

“This obviously increases the firepower of the government to fight a fight against the currency appreciation,” said Rogerio Oliveira, an emerging-markets strategist at Morgan Stanley in New York. “It makes it more expensive to trade the currency in the derivative market,” he said in a telephone interview.

As part of currency measures unveiled today, the government levied a 1 percent tax on some net short dollar positions by investors in the country’s futures market. The government may increase the tax up to 25 percent if needed, according to the decree signed by President Dilma Rousseff and published today in the Official Gazette.

‘Bigger Arsenal’

“We’re reducing the advantages enjoyed by speculators, and we expect the real will weaken or stop appreciating,” Finance Minister Guido Mantega told reporters in Brasilia today. “If we hadn’t taken these measures we’d have an exchange rate who knows where, hurting exporters and domestic production.”

Mantega said the “bigger arsenal” of tools at the government’s disposal, designed in coordination with the central bank, will weaken the real without hurting exporters or other investors engaged in “legitimate” hedging to protect themselves against currency losses.

Since last year, the government has tripled a tax on foreign purchases of domestic bonds, increased reserve requirements on short-dollar positions and raised levies on foreign loans.

“The market until now has been of the opinion that the previous measures weren’t effective against continued inflows and the still relative attractiveness of the carry trade,” analysts at RBS Securities Inc. in Stamford, Connecticut wrote in a note to clients today.

Engineering ‘Pain’

“With these latest measures, the government has shown that it does matter in that they do have the ability to engineer more pain through an onshore USD squeeze,” RBS said.

Mantega tripled to 6 percent a tax on foreign investors’ fixed-income purchases in October to limit the real’s advance. On March 29, the Rousseff administration increased to 6 percent a tax on new corporate loans and debt sales abroad by banks.

The central bank said July 11 it would require that banks make non-interest bearing deposits with the central bank equivalent to 60 percent of short dollar positions that exceed $1 billion dollars or their capital base, whichever is smaller.

The new currency derivatives tax “creates difficulties to increase short positions, but the real should continue its long-term trend in a slower manner,” said Guilherme Figueiredo, who helps oversee $1.5 billion of assets as director at M. Safra & Co. in Sao Paulo.

50-Percent Rally

Yields on the interest-rate futures contract due in January, the most actively-traded in Sao Paulo today, were unchanged at 12.47 percent.

The real has rallied 49 percent since the end of 2008, the most among emerging-market currencies, curbing exporters’ profits and swelling the nation’s current-account deficit.

Central Bank President Alexandre Tombini said the measures, which the monetary authority helped design, will strengthen the financial system.

“It’s a measure we’ve been discussing to reduce hedging against the dollar and in favor of the real during this time and period when we have ample global liquidity,” Tombini told reporters in Rio de Janeiro.

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