What is the Carry Trade? In general terms, Carry Trade implies taking funds into a strong currency, converting them to another currency that pays a higher interest rate and then investing them in local instruments. After a while, the investor reverses the operation and converts his holdings again to the original currency, ideally obtaining a return, measured in the original, positive currency. This practice is used internationally, but in Argentina it becomes particular relevance since, before rates in pesos much higher than those of the rest of the world, the temptation of the so -called “financial bicycle” is very large.
In local practice, Carry Trade is usually done as follows: An investor with dollars converts them to pesos, places them into high -performance local instruments for some time and then repurchase dollars. If repurchase at a price similar to the initial, you will get a much higher dollar return than you could have obtained if you have made the investment in the original currency. In a stable dollar context – whether due to market conditions or official intervention – this maneuver pays fruits because the rate in pesos is very high. Therefore, while the exchange rate remains calm, the carry trader business works and attracts international capitals that are mostly short -term.
Risks and benefits. The attractiveness of Carry Trade in Argentina are evident. First, it offers high returns in the short term: if the context is favorable, the profits can be very significant thanks to the rate gap. For example, in a month of relative calm the dollar the dollar came to fall 2% while the local rates were 4% monthly, which allowed to obtain a dollar yield close to 6%, a monthly profitability that exceeds the annual performance of a United States Treasury Bonus. In that sense, taking advantage of high rates in pesos translates into rapid profits in hard currency, provided that the price of the dollar is maintained under control.
However, Carry Trade in Argentina also implies considerable risks that cannot be underestimated. The most obvious is the exchange risk, since the typical monthly gain between 3% and 5% and can vanish with a rise in the dollar of just that same percentage. In the prelude to the elections, It is fundamental Remember the 2019 experience when the weight was devalued around 20% in a matter of days, evaporating in a short time the earnings of months. To this danger is added the political and economic uncertainty: in periods of elections or changes of government, the dollarization of portfolios usually accelerates, generating a sudden demand for currencies that breaks the exchange calm necessary to sustain the Carry Trade. Finally, since Argentine history demonstrates that in the face of exchange crises, governments resort to abrupt direction and controls, the regulatory risk still persists: the return of the stocks or new obstacles to the purchase of dollars would leave trapped to those who stayed in pesos, preventing them from dollarizing their savings and forcing them to leave the strategy by half. Although currently the exchange market looks freer, it cannot be ruled out that future electrical blows force the Government to reimplant restrictions.
At macroeconomic level. Beyond the individual profits that investors can obtain, the carry trade has visible effects in the macroeconomic plane. When capitals enter the country in search of yields in pesos, those dollars are sold in the local market and generate an additional foreign currency offer that, in the short term, contributes to relieve the pressure on the exchange rate, strengthen the international reserves of the Central Bank and transmit an image of monetary solidity. The resulting weight flow, when channeling towards bonds, shares and other domestic financial instruments, is usually translated into an increase in local assets prices and a reduction in country risk. This apparent “virtuous circle” generates transitory stability conditions: the dollar is maintained content, the assets in pesos are valued and the confidence climate is reinforced. It is no accident that, at certain times, the Carry Trade has been functional for the governments on duty, giving a feeling of economic calm.
However, this stability rests on very high interest rates, which are also suffocated to other sectors of the economy that depend on credit to produce and invest. For all those who need financing, the cost of borrowing becomes prohibitive, more expensive projects, limiting investment and reducing consumption. In other words, the same instrument that gives oxygen to the macro generates pressure on the real economy. The Argentine experience shows that the same flow that one day holds to the market can, the next, to become a factor of instability if investors decide to go out massively. This inherent volatility makes the Carry Trade an ambivalent instrument for both investors and the country, since what appears today as an opportunity tomorrow can be transformed into a source of vulnerability.
*Sergio Rodríguez Glowinski is an economist, director of Ingeco Argentina and a stock market agent in the USA.
By Sergio Rodríguez Glowinski
