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Brazil Real Trades Stronger Than 2 Per Dollar as Inflow Tax Cut

Brazil’s real traded stronger than 2 per dollar for a fourth day as the government cut a tax on foreign investment in real estate funds, prompting speculation inflows will sustain the currency’s rally.

The real slid 0.1 percent to 1.9915 per U.S. dollar at close in Sao Paulo after advancing beyond 2 on Jan. 28 for the first time in almost seven months. Its 3 percent rally in January is the biggest among the 16 major currencies tracked by Bloomberg. Swap rates on the contract due in January 2017 rose two basis points, or 0.02 percentage point, to 8.85 percent.

Brazil exempted foreigners from a 6 percent tax known as the IOF when they buy shares in real estate funds traded on the stock exchange, Dyogo Oliveira, deputy executive secretary at the Finance Ministry, told reporters in Brasilia today. The move came after the central bank intervened in the currency market twice this week to support the real.

“When you loosen the IOF, it shows that you want more inflows,” Paulo Nepomuceno, the chief economist at Coinvalores CCVM in Sao Paulo, said in a telephone interview. “If the Finance Ministry is doing this, it shows they don’t want the dollar to appreciate.”

Foreigners will still pay the IOF when investing in other real estate funds, Oliveira said. The impact of the measure on the currency market won’t be significant, he said.

The real pared its drop yesterday as the central bank offered greenbacks to support the currency, overshadowing Finance Minister Guido Mantega’s comment that the government is ready to stem exaggerated gains.

Bank Intervention

There was no demand yesterday when the central bank offered $1.27 billion of foreign-exchange credit lines with a repurchase date of April 1 and a maximum rate of 2.005795 per dollar, said an official with knowledge of the matter who asked not to be identified because he wasn’t authorized to speak publicly.

The credit line auction shows the central bank is genuinely concerned that “volatility” is drying up liquidity in the currency market and hurting the economy by restricting companies’ access to dollars, Flavia Cattan-Naslausky, a local markets strategist at Royal Bank of Scotland Group Plc in Stamford, Connecticut, said in an e-mailed report.

Today’s removal of the IOF tax on real estate funds “still comes short of what we would consider the game changing effect of removing the IOF on foreign investments in fixed income and currency derivatives,” she wrote. “That said, with this measure and if you cut through what wasn’t said by the Finance Minister in yesterday’s speech, we conclude that the real is firmly on its way to 1.95.”

Currency Swaps

The real rallied beyond 2 per dollar on Jan. 28 after the central bank intervened to boost the currency by selling $1.85 billion of foreign-exchange swap contracts as inflation accelerated. A stronger real curbs consumer prices by making imports less expensive.

The government reduced the IOF tax for exporters on Dec. 4 after the real dropped to a three-year low and the economy expanded in the third quarter less than expected.

Annual inflation has exceeded the 4.5 percent midpoint of the central bank’s target range for 28 consecutive months. The IPCA index of consumer prices rose 5.84 percent last year, quickening from the 5.53 percent annual pace in November.

The outlook for inflation is getting worse in the “short term” while the economic recovery was less intense than expected, the central bank said in minutes of its Jan. 15-16 policy meeting published last week. 7.25 percent for a second straight meeting.

Brazil’s unemployment rate fell to a record low 4.6 percent in December from 4.9 percent in the prior month, the statistics agency reported today. The median forecast of 29 economists surveyed by Bloomberg was 4.4 percent.

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