Brazilian Government intervenes to protect Real from overvaluation

Brazilian government has added two measures to try to protect the Real from overvaluation.

They have amended a 1980 law that grants authority to the Monetary Council (CMN) to impose and control financial transaction taxes, or IOF taxes, on dollar derivatives contracts – dollar forwards and futures contracts. The dollar futures market is the biggest futures market in Brazil. Under the new rule, CMN can charge as much as 25% in the IOF tax — the limit specified under existing national laws.

In addition, they have made amendments to constitutional laws which allow the government to charge a 1% tax on all Forex Forex Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Read this Term derivatives transactions that are increasing their short dollar position greater than $10 million.

The Brazilian Real BRL is a freely floating currency though the central bank conducts regular interventions to smooth volatility.

BRL is fully deliverable onshore, but trades on a non-deliverable basis offshore; most Liquidity Liquidity The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent Read this Term is traded through the first futures onshore contract.

The onshore market is liquid, with daily spot turnover of USD10.5bn, including commercial, financial, and interbank trades. Moreover most spot volume is traded via the first futures contract on the Brazilian Mercantile and Futures Exchange (BM&F) which sees an average $20-25bn turnover per day.

An overvalued currency harms exports, subsidizes imports, exacerbates balance of payment problems, negatively effects tourism and foreign residents with dollar incomes, deters foreign investment, inflates real estate prices, and invites currency speculation.

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