We do not want your money

The Economist, Oct 14, 2010

Last week's The Economist claimed, in its Big Max Index, that the BRL is overvalued by over 40% vs the USD. While this is only one of many indexes, many in Brazil (as elsewhere) are talking about a new currency war.

Fact is, that the Real has gained much value against the USD and EUR over the past years, and is approaching (or is at) the all-time high of 2008 (before it plummeted and made holidays in Brazil a bargain for foreigners... for a while).

The Brazilian government has now responded, afraid that a further appreciation will hurt Brazilian competitiveness, and has raised the IOF (Financial Operations Tax) for foreign capital inflows for fixed capital investments for the second time this month to a staggering 6%. This is to keep "predatory investors" out of the Brazilian market, which has some of the highest interest rates in the world.

In fact, the rates are very attractive: A short-term fixed capital investment will easily give a post-tax return of over 6% p.a. - with local inflation around 5% this is still pretty attractive... if you assume FX-rates will remain stable.

Guido Mantega, the finance minister is afraid of this currency bubble... he should also start looking at a few other bubbles, most notably the housing market in São Paulo...