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Foreign Exchange

Brazil gets real

Talking of clichés, top marks to my old mucker Paul Day, chief market analyst at MIG Investments, for sending out some commentary entitled Brazil scores an own goal. The country’s decision to impose a 2% tax on foreign investments in equities and fixed instruments had the expected result and the BRL came under quite strong selling pressure.

The fact that the government is taking such action shows just how far many of the emerging markets have developed. As Milan Procházka, head of capital markets at Prague-based Wood & Company, pointed out at the recent SunGard City Day in London: “It was not the emerging markets that triggered the fall out, unlike Russia in 1997, or Mexico and Argentina on other occasions.”

After quite severe reverses at the start of the crisis, the emerging markets are generally performing strongly. Furthermore, the ongoing weakness of the USD is adding to the strength of many EM currencies, much to the consternation of their officials.

Day postulates that other countries will watch closely the impact of the Brazilian move. “This could be quite a nice test case for many regulators across the globe. This is similar in many ways to proposals suggested in South Korea regarding imposing a fee for trading Kospi futures.

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