Brazil Quietly Scraps its Tax on Foreign Investment

Today is our country’s first day of infamy… Pearl Harbor Day… I hope to visit Pearl Harbor some day, and pay my respects to those American soldiers and sailors who were attacked when we weren’t even at war with the Japanese… A day for us all to stop and think about what happened that day.

It’s all about the euro (EUR), and the Eurozone 24/7 these days… I read some interesting reports the other day that talked about what would happen should the euro break up, and the countries go back to their legacy currencies… (Now, I think that has a snowball’s chance in hell of happening, but the idea is interesting)… The writers all thought that every currency in the euro-mix would lose a ton of ground versus the dollar, except the German mark, which they had as increasing in value versus the dollar.

OK… Enough of that pie in the sky stuff! Right here, right now, the euro is trading in a tight range, between 1.3350 and 1.3450… I think traders, investors, and the rest of the lot are waiting for the Eurozone Summit that begins this Friday… Now, someone I truly admire, and put a lot of weight in what he says, David Rosenberg, believes that the Eurozone leaders need to sound very confident when they address the press on Friday, and make the press understand that they’ve formulated a workable plan that everyone agrees to implement NOW… Mr. Rosenberg believes the coordinated effort of the six central banks to provide liquidity is working, so now all the Eurozone needs to keep the wolves away from the door is to give the markets the confidence that a plan is going to be implemented…

Mr. Rosenberg then goes on to say that, should that happen, the Dow could spring 2000 points! WOW… OK… I don’t really care about what stocks do… Rather I care what direction the currencies go… Either way, up or down, just as long as it is fundamentally driven! But what I find most interesting in what he’s saying, is that the Eurozone is influencing what happens with stocks here in the US. In fact, the Bloomberg correlation coefficient — showing how much two markets rise and fall in tandem — hit 0.85, the highest level since the euro was introduced in 1999…

So… There you go! If you are a stock jockey, then you have to keep an eye on the euro… It wasn’t always this way… Stocks and currencies have difference pricing mechanisms, and a low correlation with each other… Until the financial meltdown of 2008…

Looks like S&P’s decision to put the AAA members of the Eurozone on a credit watch downgrade — which normally just precedes an actual rate downgrade — isn’t being met with much appreciation by the bond markets… And I agree… Here’s my point… Yes, we’ve seen a few Eurozone Summits happen without a resolution, but all signs point toward something happening at this next Summit, so why go and scare the bejeebers out of the markets ahead of the Summit? Why not wait-n-see, what comes of the Summit? This warning by S&P just makes things more complicated for the Eurozone leaders…

Now… If the Eurozone leaders convene the Summit without a “plan”… Then go ahead and do what you need to do, but ahead of it… Just doesn’t seem to make sense to me!

OK… There has to be something else going on besides all this talk about the Eurozone, right? But before I go on, I have to tell you that the Eurozone is stumbling, fumbling, rumbling, this morning after a German official said the nation would reject a proposal to combine current and permanent euro-area rescue funds… Not a good start to the Summit… The Eurozone leaders will have to navigate this minefield to get to a successful summit.

I bet the boys and girls at the Reserve Bank of Australia (RBA) have their collective tails between their legs this morning, after cutting rates the other day, and painting a slow growth picture for the economy… The Aussie GDP for the third quarter expanded 1% from the previous quarter. This puts their economy year-on-year at +2.5%… And the country is still dealing with last year’s drought that was followed by a Cyclone the size of the island nation! So… This strong GDP report for Australia has pushed the Aussie dollar (AUD) higher this morning…

The Aussie dollar is still weighed down by the Eurozone problems, but for this morning, it is trading higher on a fundamental reason!

The Bank of Canada (BOC) did leave rates unchanged yesterday as I said I thought they would… Canada’s internal rate is 1%, a full 50 Basis Points higher than the US rate, and that’s not counting the rate cut effect of quantitative easing, which puts the US rate at zero… The BOC Governor Carney didn’t throw any cats among the pigeons with his statement, which was very balanced, as he acknowledged the more positive results in the economy, but reminding everyone that the Eurozone problems could weigh on future growth. I found one thing that he mentioned interesting… He pointed out that growth in China and the emerging nations were strong, but then added that they would likely slow to a more sustainable pace.

The Canadian dollar/loonie (CAD) saw a better bias to move higher after the BOC meeting, and is back to 99-cents… With oil priced above $100 for the third consecutive day, the loonie is really getting some attention…

The Swiss franc (CHF) continues to slip in value versus the dollar… I do believe that the Swiss National Bank (SNB) finally found a way to get investors to quit buying francs and push the price higher… Recall last week I told you that there was talk in Switzerland that they were thinking of placing negative interest rates on deposits of francs… So, investors would have to pay to hold francs… Well, there’s been no other talk about that specific measure, but the SNB did mention the other night that they are still watching the franc’s strength…

I think for now that the markets are willing to give the SNB the benefit of the doubt here, and believe that they will implement negative interest rates on the franc… But… Here’s where the SNB could find themselves backed into a corner, for if the SNB doesn’t do anything, the markets will come back at them with a vengeance…

As I said yesterday, the Reserve Bank of New Zealand (RBNZ) will meet this week — tonight I do believe — and again I will say that I do believe that the RBNZ will keep rates unchanged, and there’s a chance that they may indicate that rates will go higher in 2012… You may recall me telling you after the last RBNZ meeting that the RBNZ Governor Bollard (whom I don’t care for, as he disses his own currency time and again) said that if the RBNZ “sees gradual pressure on domestic resources it will require future OCR increases”… (The OCR is their Official Cash Rate)

So… IF Bollard would repeat that statement or something like it, we could very well see kiwi (NZD) head towards 80-cents again… But… That’s a lot to expect from Bollard, who, as I said, normally doesn’t miss a chance to diss his currency…

And then we have the Brazilian real (BRL)… I haven’t talked about the real in a while… And long-time readers know all too well why… I just don’t like it when a country attacks its own currency… But you know what? The real has been quite resilient in the face of all the rate cuts, taxes on foreign investment, and every other trick the Brazilian government threw at it… I just didn’t understand what the Brazilian government was thinking, scaring away foreign investment, when they needed the most to help them finance the infrastructure needed to host the World Cup and Olympics in the coming years…

Well… Guess what? Finance Minister, Mantega, quietly scrapped the 6% tax on foreign investment in Brazil last week… Yes, this flew under the radar at first… But then it was revealed that Brazil was recruiting banks like Barclays and JP Morgan Chase to their bond market…

I told you all when they placed that tax on investment that they would rue the day they did that… I’m not sure they did rue the day, but they did scrap it!

Does this mean the real could get back on the rally tracks? That’s difficult to say, as most big time investors still fear the Brazilian government and their attacks on the currency… Time heals wounds, right? So… Maybe not right away… But again, be careful here… Use only the funds you put aside for speculative investments, that way, should the real get hit hard again it’s no surprise to your portfolio…

To recap… Currencies are trading in a very tight range this morning, as the markets wait for the Eurozone Summit that will begin on Friday… David Rosenberg believes that the Eurozone leaders could really put the markets at ease with a unified plan that they put in plans to implement right away… I guess we’ll have to wait-n-see… Aussie GDP was stronger in the third quarter than forecast, and the Aussie dollar has responded favorably. The Bank of Canada left rates unchanged, as will the RBNZ tonight.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning