The main media reported that Minister Sergio Massa announced that the parity of the peso with the dollar will remain fixed until 11/15/2023. Simultaneously, it was announced that an appreciable sum would be available to intervene in the free exchange market (MEP/CCL dollar) aimed at maintaining a range not publicly determined, but which according to reports would be equal to or less than the current prices in the market.
What was announced is, if it is fulfilled, a virtual exchange insurance, at no cost to the market.
I would like to dwell for a moment on some consequences of this announcement that do not seem to have been adequately analyzed, for the moment, by the different media and analysts.
A public announcement in this sense by the Minister of Economy and candidate for President is not something that can be considered trivial or that will not be defended in its compliance at all costs, at the risk of significant discredit in the future, should he be elected as President.
It is very probable that what is known in the financial market as carry-tradethat is, the decision to sell foreign currency to invest in local currency, generating a short-term financial gain with the expectation of a more or less immediate repurchase (vulgar: the financial homeland). This phenomenon has already occurred at other times and led, for example, in 2018 to the need to resort to help from the IMF to finance an abrupt outflow of foreign currency.
In this case, and with interest rates in pesos around 10% per month, keeping the official and free exchange rates relatively fixed, as is the declared objective of the government, a financial gain between today and 11/15 in around 30% in foreign currency.
To the extent that the market perceives this situation, a strong foreign exchange settlement should be observed in the free exchange market tending to invest in local currency in the short term, therefore the objective of stabilizing free exchange rates would be met, but with negative effects. very uncertain about the short-term inflation rate, since the exchange rate anchor does not seem to be credible in the medium term.
It is conceivable that, as the expiration date of the implicit exchange rate insurance (11/15) approaches, and a depletion of the Central Bank’s capacity to intervene in the free exchange market is observed, it will tend to become stressed since those who have sold will have a strong incentive to return to their initial currency positions, plus the associated gain, with the potential already observed repeatedly for a Gate effect 12 with a very violent shot of free trade. Footnote: BCRA interventions in the free market also have a very significant associated cost, since they are not own resources.
It does not seem, for the moment, that, if this capacity for intervention were exhausted, there would be other sources of additional financing that would make it possible to continue intervening in the free exchange market, although it cannot be ruled out that the ingenuity and capacity of the minister would allow additional debt to be country to finance these interventions and avoid this potential situation.
This would be the analysis for the free exchange segment, but there is also a potential risk situation in the official exchange market, which is governed by communication BCRA – A 3500.
Market players have a strong incentive to sell dollar futures for a relatively short period of time in order to earn a profit from the implicit interest rate arbitrage in futures trades. As the deadline (11/15) approaches, the contracts sold will be repurchased and it is reasonable to think that the demand for future dollars in the official exchange market will tend to increase significantly, forcing the monetary institution to intervene. selling dollar futures in an increasing way, in such a way as not to validate an expectation of devaluation of the peso with an immediate impact on prices, with a potential effect of loss due to exchange difference that, in addition to severely affecting the Balance of the BCRA, when monetized , could generate conditions for an increase in the inflation rate, if it is not intervened as was done in December 2015.
In short, it will be necessary to analyze what the final cost of a fixed exchange rate policy will be in a context of high inflation.
It does not seem, at least seen from a strictly financial perspective, a policy tending to encourage production and improve wages.
I would say that it recalls other failed experiences from the past that ended in inflationary explosions with a significant cost in terms of increased poverty and worsening of income distribution, and that generated the concept of “Financial Homeland”. It is surprising that it is a government that has been characterized by its discursive harshness against these mechanisms that activates them.
Hopefully my perception is completely wrong and the economic authorities can show that it is part of a comprehensive plan to control inflation. But along the way the speculators and arbitrageurs (in the economic sense of the term) will have a party…
Juan Carlos Soldano Deheza is an Economist
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by Juan Carlos Soldano Deheza
