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A decade ago, Brazil and Turkey were often linked in traders’ minds as the countries fighting hardest against massive inflationary currents. Now, the two countries could not be farther apart.

Turkey is now cutting interest rates in order to beckon even more growth into its burgeoning economy, with relatively little fear of near-term inflation.

But Brazil seems to be forced to keep its interest rates among the highest in the world in order to curtail inflation — even if it means that its currency, the real (quote), will remain too strong to give local manufacturers a fair base to compete against their foreign rivals.

Remarkably, Turkey’s move has actually weakened the lira (quote) by making its bonds less attractive to the global investors who have piled into every country that offers relatively high yields.

It is a vicious cycle. Investors now think that Brazil will have to raise interest rates another 175 basis points in 2011 to fight inflation, which will make Brazilian bonds all the more attractive, which will pump foreign capital into real-denominated markets and ultimately leave the real stronger than ever.

On the other hand, Turkish bond yields have risen as well — but only because foreign investors are steering clear of these assets to seek higher rates elsewhere.

Meanwhile, lower rates mean lower borrowing costs for Turkish companies, and a weaker lira means an improved competitive outlook. Good for constituents in TUR. Higher rates and a strong real mean the opposite in Brazil. Not great for the Brazilian stocks in EWZ but ultimately a plus for the currency itself, as reflected by BZF.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Turkey's Tough Rate Medicine Outweighs Brazil's Tax Approach