Exchange rate gap is being disguised in local exchange market

By Pablo Wende

Every month, the unchanged exchange rate for the American dollar against the Argentine peso heightens the competitiveness-related issues in Argentina's economy. However, the evolution in the remaining economic variables eases the consequences of an increasing exchange rate gap.

Even though the American currency triggers domestic price hikes, the US dollar depreciated in the last 45 days in comparison with almost every country's currency in the world.

The behavior of Brazilian Real is a key element in the current economic scenario in Argentina, especially considering Brazil is our main trade partner. Whereas the Argentine peso remained unchanged since the end of June (ARG$3.95 to ARG$3.955), the Brazilian real increased 2.6 percent (R$1.801 to R$1.754 per American dollar).

Thus, the exchange rate gap was partially compensated by a currency appreciation in the Brazilian Real.

This situation was repeated in almost every country's currency in the world. The Chilean peso was the most remarkable example within the Latin American economies, since it increased more than 17 percent in 45 days. Meanwhile, the Mexican peso rose 2.2 percent.

The increase in the value of the Euro is another relevant feature because the European Union is a key trade partner when it comes to Argentine exports. Against all odds, the official currency of the Eurozone rose 4.7 percent from June ($1.224) up to middle of August ($1.281). The pound sterling showed similar behaviour.


Weakness

Most Asian countries' currencies rose against the American dollar, while many investors were eager to carry out high-risk investments.

Even though the Argentine peso was virtually tied to the American currency at that time, the US dollar weakness benefited Argentina. In spite of this, the comparison might end up being incomplete: Argentina's inflation rate is so high that dollar-linked costs eventually become less sustainable, especially in those sector manufacturing tradable goods.

It is not coincidence that the local industrial trade deficit (except for the car sector) is about to be one of the highest in local e economy

The other external element hiding the strong deterioration in competitiveness due to the reduction in the real exchange rate is the high price hike in commodities. Eventually, the soybean price increase (US$380 per ton) hides the previously-mentioned deterioration in competitiveness when it comes to exchange rate and inflation rate.

All indications are that the current exchange scheme will remain unchanged in the next few months. Inflation rate is to stand at 2 percent per month; it would reach 3 percent in the first quarter of 2011.

But the government will continue to avoid abrupt modifications in the real exchange rate: no other economic measure could be as negative as a monetary devaluation facing 2011 elections.


Translated by Jimena Gibert