beyondbrics

Guido Mantega, Brazil’s currency war-making finance minister, unholstered another couple of weapons on Monday evening: a further increase to 6 per cent in a financial transactions tax (IOF) on foreign investments in fixed income, and a so-far poorly understood hike from 0.38 per cent to 6 per cent in a tax charged on collateral posted by foreigners making fixed income investments.

This is the second time the IOF on fixed income has been increased – it went from 2 per cent to 4 per cent on October 4 – and the first move on collateral. The latter move caused confusion in São Paulo. Two analysts told beyondbrics they didn’t understand it, while one trader sent a note to clients saying he’d contacted officials at the futures exchange and they didn’t understand it, either.

Even when the dust settles, however, the new measures are unlikely to have much lasting impact – though we can certainly expect a spike on forex and futures markets on Tuesday.

Just as investors have shrugged off the IOF hike on October 4, they are likely to do much the same this time. Assuming the tax sticks – and investors were quick to find ways round the last increase – a spread of more than 10 percentage points between Brazilian and foreign rates is still a powerful draw. As Alvise Marino at Credit Suisse in New York told beyondbrics: “This is not only a question of Brazil doing well but of the US doing badly. This is really a dollar story, not a local currency story.”

With more quantitative easing on the way, expect Brazil to keep reaching for more guns – with a similar (lack of) impact.