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On Thursday, Brazil’s government extended the 6 per cent IOF transactions tax to foreign borrowing of up to three years. Previously, the tax had only applied to loans with maturities of less than two years.
And the result? Well, the real actually strengthened about 0.3 per cent to 1.71 per dollar on Thursday. (The average maturity of bond placements abroad is currently around ten years anyway).
Brazil’s central bank also brought a sense of déjà vu to the market on Wednesday when it intervened twice to quell the real’s appreciation.
First, the central bank used a reverse currency swap, then it bought dollars on the spot market, managing to weaken the real back beyond the R$1.70 mark to the dollar after it strengthened to R$1.68 earlier in the day.
So is this just a re-run of the currency war that Mantega first declared late in 2010 and which petered out towards the end of last year?
The background is certainly similar. Whereas previously, quantitative easing by the US Federal Reserve was blamed for the real’s strength, this time it was the European Central Bank’s injection of €530bn into the eurozone banking system.
But investors should be wary of dismissing Mantega’s warmongering rhetoric so quickly.
For a start, the president has got involved this time round. In a rare statement on the issue from the Presidential Palace, Dilma Rousseff also vowed on Thursday to defend Brazilian industry, “making sure that the methods that developed countries are using to get out of the crisis don’t lead to the cannibalisation of emerging markets”.
Furthermore, Mantega also knows he has most of the emerging world on his side this time after countries from Peru to South Korea followed his lead throughout 2010 and 2011 by introducing their own capital controls.
He even believes the IMF is a big fan of his currency crusade. This from Mantega on Thursday: “These (currency intervention) practices were always just in reserve but today they are even recommended by the IMF. The IMF didn’t think this way and then they started to think this way, mainly after Brazil introduced intervention measures which have been successful.”
Brazil may well be fighting the same battle that it was in 2010, but don’t expect it to pull any punches this time round.