Bets are opened: Electioneering US dollar stands at ARG$4.38

By Guillermo Laborda

The one-year forward dollar exchange rate stands at ARG$4.38 in New York, representing an annual rate of 11 percent compared to the current value. This seems to be a 'present' representing half of the predicted inflation rate. Markets expect a landslide of American dollars following 2010 cereal harvest, which is predicted to reach 95 million tonnes, according to conservative estimates.

Sale of agro-chemical products soared 30%-40% in 2010. Meanwhile, cultivated area totals 31 million hectares, emulating the scene prior to the passing of Act 125. Trade surplus is predicted to total US$ 8.5 billion in 2011, according to economist Miguel Bein.

Global markets pave the way for the one-year forward dollar exchange rate to remain flat: Mexico launched a 100-year bond worth US$ 500million via Deutsche Bank and Goldman Sachs. The bond is expected to yield around 6 percent. The Mexican government was considering extending the sale up to US$1 billion.

According to JP Morgan, emerging markets debt funds are to set are to hit record high in 2010 by totaling us$70-75 billion. Emerging markets notes -denominated in both local and foreign currency- rose from US$ 3.3 trillion to US$6 trillion in the last five years.

Considering this panorama, could the US dollar exchange rate skyrocket in the electoral campaign? This scenario is unlikely as the one-year forward dollar exchange rate stands at ARG$4.38 (ARG$4.20 according to economist Miguel Bein).

Taking into account the government's flow of American dollars and the Central Bank foreign currency reserves, the situation is certainly under control. Since early 2007, flight of capital reached US$46 billion following the rural conflict, the bankruptcy of Lehman Brothers, the nationalization of Private Pension Funds (AFJPs) and the anticipation of mid-term elections. Meanwhile, Central Bank foreign currency reserves declined only US$3 billion. There is enough scope for the administration of President Cristina Fernández de Kirchner to face an unexpected crisis.

Therefore, rather than the American dollar exchange rate, we must focus on Central Bank foreign reserves. The government will certainly prevent the US dollar from fluctuating before the presidential elections. An eventual winner will determine the final scenario, especially because some candidates will encourage the growth of Central Bank foreign reserves, whereas many others will trigger certain concerns on domestic savers and foster the sale of CB reserves aimed at maintaining a stable exchange rate.

However, domestic savers will wonder whether the next administration is to devaluate the currency assuming the accumulation of foreign currency reserves could decline. A series of estimates predict flight of capital will total US$800 million per month. Bets are opened.

Translated by Jimena Gibert