Brazil's financial operation tax (IOF) was a flop (an attempt at taxing inflows of foreign held Brazilian bonds/currency).
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"BRASILIA (Dow Jones)--The Brazilian government's move to raise the country's Financial Operations Tax, known as IOF, on certain types of incoming foreign investment will be insufficient to resolve the country's problems with an appreciated local currency, Brazil's National Confederation of Industries, or CNI, said Tuesday. The group expressed general approval for the government's interest in curbing the strength of the real, but said the IOF tax hike would work only as a stopgap measure. "The government made use of an agile tool within an international scenario that's directing large-scale foreign exchange flows into the country, but it's not a definitive solution," said CNI economist Flavio Castelo-Branco. "There is ample room for other measures for containment of the real." Brazil's government late Monday raised the country's IOF tax on incoming fixed-income investment to 4% from 2% previously. Despite the measures, Brazil's currency strengthened about 1% against the dollar Tuesday, ending at a 25-month high of BRL1.673. The strong currency has hurt local exports and caused successive recent revisions in projections for the country's current account deficit. Castelo-Branco said that among measures that could aide local industry's competitiveness include increased government return of industry tax credits, improvements in local financing conditions, improvements in local infrastructure and full implementation of an export incentive package announced by the government in May. "All this needs to be accelerated," he said. The CNI economist also recommended that the government take firmer measures to encourage a strengthening of the dollar outside of its foreign exchange policy, noting other country's such as the U.S. and Japan have taken foreign policy and local monetary policy initiatives for that purpose. "Brazil can't remain outside of this movement," he said. Brazil's currency has appreciated about 30% against the dollar over the past 18 months."
Chile's concerns
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DOW JONES NEWSWIRES
SANTIAGO (Dow Jones)--Chile's peso ended stronger versus the dollar Tuesday, on robust domestic economic data, the euro's rise against the greenback and gains in international copper prices.
The peso ended stronger at CLP482.70, nearing a 28-month high, compared to Monday's close of CLP486.40. Chile's currency traded in a range of CLP482.70 to CLP485.50.
The peso fell sharply the prior session after the central bank said it couldn't rule out intervention in the currency market, but recovered most of those losses Tuesday as the country's monthly economic activity index, or Imacec, surged 7.6% on the year in August. The August gain was the largest for that month since 2004, according to Finance Minister Felipe Larrain.
The central bank said that the peso's strength is worrisome, pointing out that although the real effective exchange rate is still in line with fundamentals it is getting closer to being out of line. Still, analysts don't see an imminent threat of market intervention.
"We believe that rather than actual forex intervention, the central bank may begin signalling discomfort as peso approaches CLP470-CPL475, but actual intervention risks are closer to CLP460," said RBC Capital Markets in a note to clients.
Also, as Europe is one of Chile main trade partners, the peso often moves in the same direction as the euro does against the dollar. The common currency gained sharply on the greenback, to its highest level since February, as investors' attention turned to global central bank actions targeted at propping up slowing economies.
Additionally, because Chile is the world's top copper producer, accounting for over a third of global supply, the peso often takes cues from the metal's international prices.
Copper futures in New York increased as the dollar weakened against its major rivals. A weaker dollar tends to benefit dollar-denominated contracts like copper futures, as they become cheaper for investors using foreign currencies.
In the bond market, yields on inflation-indexed Chilean central bank bonds, or BCUs, ended higher after the minutes of the central bank's September monetary policy meeting signaled the possibility of slower rate hikes in coming months.
In June through September the central bank hiked the benchmark interest rate by 50 basis points each month, to where it stands now at 2.5%.
Recent comments by central bank board members, however, suggest that peso appreciation should weigh on future rate increase decisions, "signaling that the pace of rate hikes could slow to 25 basis point moves going forward," RBC Capital Markets said.
The yield on five-year BCU bonds ended at 2.79%, from 2.76% Monday, while the yield on 10-year BCUs closed at 3.11%, from 3.08% the previous session.
Chile Peso @ 482.80 multi month high (v'sUSD)
Brazilian Real @ 1.6690 multi month high (v'USD)
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