Greater dollar demand in Argentina despite the globe rejects it

BCRA head Martín Redrado

GDP coupons benefited from statements made by Argentine presidential candidate Cristina Fernández de Kirchner, who stated that no adjustments would be made to lower inflation. As a result, they climbed more than 5 per cent. In an euphoric day in global bourses, these derivatives, which are attached to debt swap bonds though traded separately, were the most sought instruments of domestic market.

CER-adjusted sovereign bonds denominated in dollars and in pesos also climbed, going beyond 1.5 per cent. Although investors are still cautious when only three weeks are left for presidential elections, many of them are attracted by yields offered by Argentine bonds.

Within this framework, it was surprising to see sustained dollar demand. On other occasions, when peso-denominated bonds climbed, positions in foreign currency were dismantled. That did not happen this time, showing that companies and the public prefer to protect themselves before elections.

Firm dollar

Dollar remained stable during Tuesday's session and Argentine Central Bank (BCRA) was forced to sell around $10 millions so as to avoid greater hike. In Forex-MAE, main wholesale market, the American currency closed at ARG$3.1620. It opened at ARG$3.1580. Yet, it shortly after gathered strength to settle above ARG$3.16. In exchange agencies, dollar ended at ARG$3.18, though it tends to rise to ARG$3.19 due to strong demand from the public.

In order to see how retailers are putting pressure, we should take look at trading. In Forex-MAE, $195 millions were negotiated. This market usually doubles MEC (money changers' market). However, on Tuesday, they moved almost the same amounts.

Time deposit rate drop and inflation imagined by the public, which is not the same one as that of Argentine Statistics and Census Institute (INDEC, in its Spanish acronym), have led people to protect themselves by buying dollars.

Argentine presidential candidate had said the day before that Argentina should get used to live together with inflation, because consumption would not cool down. Such a decision benefits coupons adjusting by economy growth, with the advantage that INDEC, as opposed to bonds indexing by cost of living, also favours them.

With this record and certainty that economy will continue hot, investors threw themselves into GDP coupons. Version denominated in pesos climbed 5.10 per cent, while the one in dollars, New York law, 3.71 per cent.

Rise of peso-issued coupon happened with ARG$14-million trading in the Electronic Over-the-Counter Market (MAE, in its Spanish acronym), one of the highest volumes since starting quoting in December 2005.

Meanwhile, swap bonds posted interesting rises, though not because the outlook has changed, rather because their prices settle at really low levels. Discount in pesos leaped 1.10 per cent, while Par in the same currency, 1.50 per cent. Both instruments adjust by cost of living. Reason why their prices have a ceiling.

Country-risk slid 4.74 per cent to 370 points, after dollar-denominated debt swap bonds quoting in New York jumped more than 1.50 per cent.

Record

Meanwhile, Wall Street broke a new all-time record yesterday Tuesday and infected the remaining markets. Yet, Buenos Aires Stock Exchange only earned more than 0.2 per cent. Dow Jones soared 0.86 per cent. US Treasury 10-year bond rate settles at 4.65 per cent, boosting purchase of emerging countries' bonds. For the time being, GDP coupons and dollars are the most sought assets in domestic market. Argentine government should check its hiding-inflation-reality policy because market is twisted and it has fallen in the hands of speculators.