Wednesday, July 27th 2011 - 19:28 UTC

Brazil intervenes the derivatives markets in a bid to weaken the Real

Brazil imposed on Wednesday a tax on bets against the US dollar and warned it may boost intervention in the nation’s derivatives market in a bid to weaken a currency that reached a 12-year high this week. The Real declined by the most in almost three months at times loosing up to 2% to the US dollar.

“More to come, if necessary” said Mantega who said measures were triggered to combat speculation

As part of a new round of currency measures unveiled Brazil levied a 1% tax on short dollar positions in the country’s futures market above 10 million dollars in notional value. The government may increase the tax up to 25% if needed, according to the decree signed by President Dilma Rousseff and published in the Official Gazette.

Finance Minister Guido Mantega said that the measures give the government a “bigger arsenal” of tools to defend itself from “speculation” that the Real will continue to rally amid global economic uncertainty.

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

However Investment are pouring into Brazil as the nation develops offshore oil finds and prepares to host the 2014 World Cup and 2016 Summer Olympics. Foreign direct investment jumped to a record 69 billion dollars in the 12 months through June, the central bank said Tuesday.

Even as Brazil takes the lead among regional governments trying to deter inflows fuelled by near-zero interest rates in the US, the country’s current account gap narrowed in June to 3.3 billion dollars, its smallest in 10 months, as high prices for commodity exports offset a surge in imports.

Policy makers in Latin America’s biggest economy have taken steps to ease capital inflows to stem a rally in the Real, which Tuesday traded at its strongest level since Brazil abandoned its peg to the dollar in 1999.

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

Wednesday’s measures, while applicable to all investors, will primarily affect foreign investors who hold the bulk of about 25 billion in bets against the dollar on Sao Paulo’s future exchange, said Nelson Barbosa, executive secretary at the Finance Ministry.

Barbosa said the tax will stem the currency’s 49% rally since the end of 2008 because the bulk of pressure against the currency comes from futures market, which dwarfs the size of the spot currency market. No additional currency measures are expected to be announced at Thursday’s meeting of the monetary council, which is comprised of officials from the central bank, finance ministry and budget ministry, he added.

While the measures will raise hedging costs for exporters, the increase will be offset by a weaker Real, said Barbosa. Short dollar positions held before today can be rolled over without paying the tax, Barbosa said.
 

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