Central Bank neutralizes savers' fears

By Pablo Wende

Thursday wasn't a regular day at the world markets and Argentina's Central Bank couldn't be an exception. The banking institution sold forward dollars and allocated around US$190 million to calm investors down. Indeed, the Argentine Central Bank let the exchange market move at its own pace and bought US$ 80 million.

This was part of a message sent by Central Bank Governor Mercedes Marcó del Pont, who repeated the method implemented as soon as she took office at the end of February: diminishing foreign currency reserves loss, especially in a context of extreme restlessness.

Purchasing foreign currency reserves has an additional logical argument: being the access to global markets blocked, the only way for the government to meet US dollar denominated debt in 2011 is again by using the Central Bank foreign currency reserves. Therefore, it is essential to strength the reserves as much as possible in order to be ready to help the Treasury by the end of the current year.

Message

Even though the official purchases have boosted the US dollar quotation in two cents so far in the current week (from ARG$ 3.91 to ARG$ 3.93), the message aiming at showing the volatility of the American currency is to be diminished as much as possible. At least for the moment, not even the strengthening of the American dollar worldwide or the Brazilian Real's significant depreciation -yesterday, it closed at 1.86 to the US dollar-will trigger a relevant gap in the exchange rate.


"Brazil's Real experiences strong oscillations in the exchange market, and every time Brazil posts capital outflow, the local currency drops. Just two days ago, it slightly increased its value so far in 2010. It has depreciated now," sources in the banking institution claimed.


They also insist on the fact that despite the increasing inflation rate, Argentina maintains high level of competitiveness. "Not only the foreign exchange rate shows wide margins, but also the Argentine economic growth will be achieved with a low job creation rate, which represents an improvement of the productivity levels."

Thus, the Central Bank is not only willing to avoid abrupt oscillations as a way to curb price increases. A stable US dollar quotation also represents the best reinsurance for people to remain calm, since the demand for foreign currency has substantially dropped from March. "The capital flight has dramatically declined, maintaining its downward tendency."

However, it is still too early to draw conclusions. Government officials at the Economy Ministry and the Central Bank agree on the idea that the European financial crisis will remain for a long time. Its final impact on the global economy and the emerging markets remains to be seen.

Variable

Decidedly, the performance of the Brazilian currency is the main variable to follow and establish the future of the foreign exchange rate in Argentina. All indications are that the devaluation process of the Brazilian currency has just begun.

A treasurer from a foreign bank adds key information to the matter: "The Australian dollar has already depreciated 13 percent since the Euro crisis burst out. The Brazilian currency meanwhile depreciated just 6 percent. These conditions show it will maintain a downward tendency."

A highly-likely to happen scenario shows the US dollar quotation in Brazil exceeds 2 Brazilian reales (it reached 2.40 during the crisis undergone between 2008 and 2009). In this case it will be almost impossible - and even pointless- for the Argentine Central Bank to maintain the current quotation of the American dollar at ARG$ 3.93. But any rising movement is to bear the mark already set by ousted CB chief Martín Redrado; i.e., it will be as stepped as possible.


Translation by Jimena Gibert