Brazil exchange traded funds could find support as the government removed a tax on foreign investment inflows, allowing global investors to move freely in and out of Brazilian markets.
Due to a drop in foreign inflows, Brazil has removed the financial transaction tax, or “IOF,” on foreign purchases of government bonds and other fixed-income instruments, report Nestor Rabello and Alonso Soto for Reuters.
“We have observed a reduction in the international liquidity coming to Brazil… We are removing the obstacles for the entry of capital,” Finance Minister Guido Mantega said.
The 6% IOF tax prevented the real from quickly appreciating in what appeared as a tool in the latest so-called currency war to fend against global loose monetary policies and quantitative easing measures.
“The IOF tax was originally introduced in 2010 to coiner-balance potential inflows to Brazilian government bond markets arising from Quantitative Easing policies in the U.S., Europe, and Japan,” Jan Dehn, head of research, and Gustavo Medeiros, Brazil product manager, at Ashmore Investment Management, said in a research note.
However, with the speculation that the U.S. will taper its stimulus measures, the Brazilian real, along with other emerging-market currencies, has been weakening.
“Today, with the market returning to normal and the (U.S. Federal Reserve) likely reducing its expansionist policy, we can remove this obstacle,” Montega added.
The currency has depreciated from a March 8 high of 1.94 Brazilian reals to the USD to its current price of around 2.13BRL, or an 8.9% drop. The WisdomTree Brazillian Real Fund (NYSEArca: BZF) is down 6.8% over the past three months.