Tuesday, October 19, 2010

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...

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