New "financial bike" puts dollar stability at risk again

The Central Bank has purchased USD 394 million so far in January. However, the wholesale price ended Friday at $ 37.03, nearly 2% under the floor of the "no-intervention zone". This was the biggest gap since the implementation of this program since last October, at the suggestion of the IMF.

The president of the entity, Guido Sandleris, acknowledged that at present, he is not thinking of increasing the purchase of dollars, given the limit of 50 million dollars American per day, imposed from January. However, international banks such as Morgan Stanley have begun to speculate that such an intervention could accelerate rapidly if the exchange rate continues to fall.

For BCRA, the decision that awaits it is not simple: If you drop it too much, the danger is the return of the exchange rate and the loss of competitiveness, taking into account that inflation "in cruise" will be 2.5% per month at least until April. If instead he buys all that is necessary for the quotation to go beyond the floor of the trading band, too many pesos will be issued, with the inflationary danger that entails.

No mathematical formula can determine what is best or what is the optimal point of intervention. Aware of this, Sandleris opted for an intermediate way: buy dollars but very gradually not to exaggerate with the monetary expansion.

The "zero emission" monetary program had as its exit valve the issue of pesos in case of dollar perforation by the dollar. And that's what began to happen this month. As a result, the downward trend in interest rates has also resumed. For Leliq, they went from 59% to 56.5%. For many, this descent is still too slow.

The decline of the dollar is also badociated with other phenomena that are added to the "financial summer" that Argentina is going through: they are accompanied by an increase in stocks and bonds, and then by a decrease in risk. country, which went from 830 points to around 660 in just three weeks.

EThe beginning of the year was unbeatable for Argentina, but motivated by an improvement in the investment climate around the world. Wall Street continues to climb in January and capital flows to emerging countries have returned. Argentina this time benefits.

Another political factor adds to this financial windfall: foreign investors have the impression that Mauricio Macri will be reelected. Or at least that Cristina Kirchner has no real chance of returning to the government. The greater the stability of the dollar, the greater the portfolio managers' vision, most of them being based in New York.

The inevitable question is to what extent is this tranquility of the exchange rate sustainable?. In the short term, there does not seem to be much surprise. Bull market brokers, for example, have warned that in February, dollar earnings will fall as the record crop of wheat and soybeans remains small to sell. Therefore, reducing the supply could lead to stronger upward pressure.

However, Another factor is worrying the government as presidential elections approach and the degree of uncertainty increases. This is a typical phenomenon not only in Argentina. The dollar in Brazil rose more than 20% in the previous election: the dollar reached 4.20 reais and has now stabilized at 3.70 reais.

The goal of the "Zero Expansion" plan is to control very strictly the amount of currency in circulation, which is called in financial jargon "monetary base". Nicolás Dujovne explained in an interview early October: "If there are no pesos, you can not run against the dollar".

The finance minister's statement is in fact supplemented by another aspect: high interest rates to convince those with pesos that, instead of buying dollars, they are still in local currency.

Fixed deadlines flew from October and proved to be a brilliant venture. In less than four months, term deposits increased by $ 300,000 million. This money was attracted by very positive real rates, that is to say that they were gaining from several agencies with the expected inflation. The phenomenon is fed in addition to a declining exchange rate, which increases the gains obtained in pesos.

This strong expansion of fixed-term contracts, which is obviously good news, also raises serious concerns within the economic team. What will happen to this money when the elections come closer and the dollar starts to rise?

The recurrent currency and banking crises that occurred in Argentina 40 years ago show that Fixed terms are much more volatile than deposits in current account or savings account. Transactional currency generally does not undergo large variations: this is what companies or the public need to perform their daily operations.

The $ 300,000 million added over the last few months has been attracted by the perception of a too high dollar and very high interest rates. But little by little, the perception begins to change: the exchange rate is not so high and the rates are attractive, but not as high as a few months ago. The damage capacity of such a quantity of money that has been reversed almost overnight in fixed terms is enormous.

The last time the carry trade bets were overthrown, that is, the profits generated in pesos by a reverted exchange rate, a real disaster occurred.. Last April, the mbadive disarmament of Lebac caused a dissolution that ended with a 110% rise in the dollar, a significant drop in GDP and the search for the IMF bailout. From now on, "non-bank" investors can no longer invest in Lebac. The "financial bike" consists of traditional term deposits.

This traditional peso stealing towards dollars in times of high "stress", as well as the proximity of a presidential election, forces the Central to be extremely cautious about lowering rates. So, the expansion of weights for the purchase of currencies should be done in dropping, precisely not to trigger a sharp fall in yields in local currency. That's what happened in the first months of 2018 and it turned out to be a fault committed by the president of the Centrale, Federico Sturzenegger. Sandleris seems to have learned the lesson.

These fixed deadlines are not monitored under the agreement with the IMF (that is, they are not part of the "monetary base") could define in which measure the dollar can jump in the pre-election election.

For the moment, the danger seems rather diffuse, very far away. With an international context and investigations that are not entirely negative for the government, everything seems to be on the right track. But it would be absurd to "sing the victory" at nine months in October. The dollar, once again, will again be the great arbiter of the presidential elections.