Real, the major Brazilian currency has risen from a 4-year low figure as the Brazilian Government removed a 1% tax which was charged on the wagers against USD. This is part of the 2nd easing that happened right on this week of capital controls, in an attempt to stem the rout of the local currency. Swap rates on contract due in January, 2016 went down by 10 basis points to 10.25%.
Real is currently at 2.1441 per USD as it went ahead by 0.6%. On yesterday, it experienced a decline and went down to 2.1564, marking the lowest figure of the same since May, 2009. According to the Chief Economist of Votorantim Ctvm, Roberto Padovani, the effect of the measure taken by the Brazilian Government is going to be limited. Padovani added that the current behavior of Real is pretty much related to the international fundamentals.
In last 3 months, Real has performed the worst among all the major currencies as there have been speculations that the Federal Reserve will be curbing the monetary stimulus program which had supported the emerging market assets in a big way so far. Brazilian Government is currently unwinding capital controls which it started in 2010 to defend the country from the policies of the developed countries. Guido Mantega, the Finance Minister of Brazil characterized the same as currency war then.
The administration run by the President, Dilma Rousseff removed the tax on USD shorts in the futures market after the 4 currency swap interventions done right in this week were not able to stem the decline of Real. Apart from all these measures, the Brazilian Government has also created an $8.7 billion credit line for the low income families. Incidentally, only on last week, the tax named IOF was reduced as well. IOF used to be imposed on the foreign investors buying Brazilian bonds in the domestic markets.
Mantega stated that as USD is getting to a stronger zone, there is no reason to have an obstacle in place. The IOF has been reduced so that the supply of USD in the futures market increases.
The Latin American currency strategist of Bank of Nova Scotia, Eduardo Suarez stated that the derivatives tax cut will be providing Real some relief; however, the same is still being hurt by the waning confidence in the policies of the Government.