Brazil appears to be calling a truce in the currency wars. Or maybe it is a unilateral disarmament or just plain old surrender (via the FT): 

Brazil has dismantled one of the cornerstones of its so-called currency war against foreign fund inflows, by slashing a tax on overseas investments in domestic bonds. The government late on Tuesday cut the financial transactions tax, known as the IOF, from 6 per cent to zero in a move that signals its concern that Brazil's currency, the real, is weakening too quickly against the dollar.

Guido Mantega, Brazil's finance minister, offers this explanation:

"Today, with the market normalising and the movement of the [US] Federal Reserve to reduce its expansionist policies, we were able to remove this barrier," finance minister Guido Mantega said.

Yeah, nice try Guido. This falls into the category of "careful what you wish for". Brazil wanted a cheaper Real and now they've got it and all the trouble that comes with it. Brazil's inflation rate has jumped to 6.5% even as GDP growth has stagnated and the Real has fallen by 20% since the peak in 2011. Just last week the central bank hiked interest rates by 50 basis points even in the face of GDP growth that fell to just 0.6% in the 1st quarter. You don't hike rates in that situation unless you are really worried about inflation. Furthermore, the hike was meant, more than anything to try and stabilize the Real or even get it to move higher. The cut of the transaction tax is intended to accomplish the same thing, although Mantega denied that:

"There is no intention on the part of the government to conduct anti-inflationary policies through the exchange rate,"he said. It was withdrawn to reflect the regularisation of the market, he added.

Mantega can say that with a straight face but that doesn't make it true. This is about trying to attract capital inflows to spur growth and dampen inflation. With their sugar daddy China slowing, Brazil is in a pickle. The falling Real raises inflation but hiking rates hurts growth which makes investing in Brazil less attractive. And now that the market knows they are in a rate hiking cycle, there is less urgency to buy bonds since a further fall in the Real will likely mean another rate hike which will further hurt growth, etc., etc. The further the Real falls the more they will have to hike rates to compensate for the risk of further devaluation. In a world of floating exchange rates, stagflation is a vicous circle.

Hiking rates and cutting the transaction tax may work for a while but exchange rates aren't just about interest rate differentials and taxes. More than anything capital flows are driven by growth expectations and right now, with China slowing and commodity prices falling, Brazil's prospects are looking pretty bleak. The commodity boom of the last decade gave Brazil an opportunity to reform their economy. It's looking more and more like they've blown it again. Instead of spending on education they're wasting capital trying to impress the world by hosting the Olympics and the World Cup. Instead of reforming their byzantine tax code, they're trying to manipulate exchange rates. There's an old saying that Brazil is a country of the future and always will be. Apparently it is just as apt today as when it was coined.