Brazilian Bonds and Stocks

Late yesterday Brazil announced it would impose a 2% tax on foreign purchases of Brazilian bond and stock transactions. This is particularly aggressive in that the new tax replaces a 1.5% tax that was scrapped last year during the crisis and only was applicable to fixed income purchases. The new tax goes into effect today. The tax may weigh on the Brazilian real in the short-run, sentiment towards Brazil is likely to remain positive. As noted the tax has been adjusted recently and it is difficult to see its impact. The bullish Brazil story, that has lifted the stock market by almost 80% this year and has made the real the best performing major currency against the dollar, up nearly 35% this year has been its high interest rates, commodity intensive economy, the global investment climate favoring high yielding high risk assets, and what appears to be a diversification of portfolios, especially by Japanese and American investors. Data from the local stock market indicates that foreign investors have bought around BRL17 bln worth of Brazilian shares this year. The dollar has been forming a base near BRL1.70 in recent sessions. The BRL1.75 area is the first area of notable resistance.