BCRA buys more bonds changing market course

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In a day in which global markets plummeted in keeping with Wall Street's 1.7-per cent loss, Argentine Central Bank (BCRA) surprised everyone intervening strongly in market. The monetary authority bought peso-denominated Discount bonds, an instrument quoting at nearly default parity. Rises went as far as to touch 5 per cent. BCRA chief, Martin Redrado, made those purchases against dollars, decompressing at the same time foreign exchange market. Spot transactions with settlement (dollar to take capitals away from the country) retreated 1 per cent.

Argentine Central Bank (BCRA, in its Spanish acronym) redoubled bet: it sold dollars again, pushing wholesale quote down to ARG$3.135. At the same time, the monetary authority went out aggressively to buy peso-denominated Discount bonds (the most punished instruments during last week's run), which climbed more than 5 per cent. To achieve so, it pumped around ARG$100 millions.

With dollar falling steeply and rate rise, some may be thinking of a substantial change in economic policy, which, during the last years, has defended just the opposite. "Nothing to do with that, that's mere BCRA trading so that those running to buy dollars lose," traders reasoned. Reserves only plunged $20 millions yesterday, showing that it's easier to contain or cause dollar fall.

How long would it stay in dollars at these levels or even lower? On Wednesday, the American currency closed at ARG$3.155 in exchange agencies. According to banks' trading desks, BCRA will hold on a couple of weeks, at least till the beginning of June. The main reason is that investors bought future dollars falling due in a month and they will be forced to cover sharp losses when contracts mature.


Next month, if farm clash is solved, a heavy dollar rain from farming sector should fall. Around $100 and $150 millions daily, which will be partly repurchased by BCRA, reverting sale cycle observed during the last 45 days. More than $1.2 billion in reserves have already been lost. Only if grain marketing goes back to normal, BCRA would be in conditions to recover them next month.

There are some aspects to take into account with respect to strong BCRA intervention, both in foreign exchange and government bond markets. Next you will find some points:

The intention is to gradually revert redollarization by great investors (companies, banks) and the public. This process was observed in the case of institutional investors through peso-denominated bond sale and mass purchase of foreign currencies or future dollar contracts. Retail investors applied their pesos to get currencies.

Interest rate rise (12 per cent for retail time deposits and 14 per cent for wholesale ones) would be aimed at encouraging those staying in pesos. These are still highly negative rates in real terms because inflation settles at 25 per cent minimum. However, all the same, it's an interesting deal if yield is estimated in dollars. BCRA is not willing to push these yields down, at least not in the following weeks.

Yesterday was a more promising day. Several banks had positive deposit flow after more than ten days of continuous flight. It was not widespread, since other entities still had fund withdrawals, though lighter.

Sharp rise of peso-denominated Discount posted lately (accumulating more than 10 per cent in a week) is also part of the lesson of those selling at sale price. These bonds settled around ARG$99, but last week they had fallen from ARG$88. This may be a sign for those daring sell dollars and buy again Argentine bonds, even when the effect of inflation index manipulation persists.

The combination of higher rates in pesos plus really cheap future dollar contracts (influenced by BCRA intervention) allows arbitrations with almost certain profits. The transaction is simple: a time deposit denominated in pesos in six months time is made. While the yield of this placement may reach to 14 per cent annual (for being a longer term), year-end dollar purchase only costs an implicit 4.2-per cent annual rate. As a consequence, investors can earn 10 per cent annual in dollars without running greater risks. This kind of opportunities would not last much, since artificial prices come up set by BCRA.

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