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 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 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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