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Opinion

Brazil: No end to real’s rise

Brazil’s government is a victim of its own economic success.

The Brazilian government is concerned about the real appreciating against the dollar but the tax measures it has taken so far offer little respite for the climbing currency.

On November 18 the Brazilian government announced plans to place a 1.5% tax on those issuing depositary receipts in international markets in a bid to prevent companies from selling shares abroad rather than locally. This new measure aims to balance out distortions caused by the 2% IOF tax on foreign investors when they buy stocks and fixed-income securities. This IOF tax was introduced on October 19 to curb a rally during which the real appreciated 43% against the dollar in the previous 12-month period.

It seems unlikely that either of these measures will curb real appreciation if macro conditions continue to improve. On November 23, the real strengthened 0.4% to R$1.725 to the dollar.

Commodity prices continue to tick upwards. With the Brazilian economy strongly tied to them, Brazilian assets stay attractive despite the new taxes.

Further real pressure is coming from investors that aren’t willing to sell. While Brazil stays relatively attractive and continues to benefit from a risk-positive environment investors already holding Brazilian assets are staying put.

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