New Tax Will Do Little To Stem Appreciation

We believe the latest extension of the IOF tax on foreign borrowing will do little to stem the appreciation of the real as investors will continue to be attracted by Brazil's growth story and the impressive carry on the currency. On March 29, when the tax was announced, the BRL strengthened by 1.0% against the dollar, pushing through the key BRL1.6500/US$ level to trade at BRL1.6455/US$ at the time of writing. In our view, this considerable move on the back of the announcement was a sign that investors' were fearing a more aggressive currency intervention by the Brazilian authorities.

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