Vows to keep dollar ceiling at ARG$3.20

BCRA head Martín Redrado

After elections, Argentine administration will keep its commitment to prevent dollar from going beyond ARG$3.20, at least till changing management. Policy followed by Argentine Central Bank (BCRA, in its Spanish acronym) to guarantee liquidity in market and, if possible, to keep interest rate at low levels, won't change either.

One of the mysteries which will be uncovered as of today is whether monetary and foreign exchange market will find a balance or if distrust will continue, an everyday occurrence in the last three months. Investors took for granted that the presidnetial candidate Cristina Kirchner was going to win without ballotage. Yet, new analyses will surely start coming up as of today. On Friday, with a breath of fresh air coming from a marked rally in foreign markets, peso-denominated bonds rebounded 4 per cent, although they settle almost 25 per cent below January's top levels.

One of the priorities of the economic management, once electoral period has come to an end, is to recover reserves lost during the last 90 days. The stock moved from a maximum of $44.23 billions on July 24 to $42.62 billions (last official figure on October 19). Yet, officials from Economy Ministry and BCRA are confident that all what has been lost will be recovered in the last two months of the year.

Reserve decline coincided with a significant increase of dollar demand by the private sector (both companies and the public). This reaction led BCRA to launch into market vigorously to sell foreign currencies, both in spot and in futures markets, so as to prevent quote from exceeding ARG$3.20.

The mirror of this greater interest in dollar was a marked decrease of peso-denominated time deposits. According to official information from BCRA, time deposits in pesos plummeted 2.5 per cent during the last 30 days. That explains why BADLAR (rate paid by banks for wholesale time deposits) continued at high levels during October, reaching to more than 13 per cent at the middle of last week. In order to reduce deposit drop, entities are paying greater yields.

Expectations

Of course that, at the same time, inflationary acceleration moves the public away from the possibility of peso-denominated investments, because there's no reward.

A number of factors are generating positive expectations in the economic team with respect to the possibility of recovering reserves. Next, you will find main points working in favour of foreign exchange market trend:

After elections, and knowing there won't be second round, investors will have less doubts. Therefore, foreign banks and funds may return, looking for financial opportunities in the country. If that actually happens, new foreign funds will come in. Last Friday's market close, with a strong trading and 4-per cent rises in sovereign bonds, boosted this optimism.

By the end of November and particularly throughout December, dollars from crop should come in. With record prices in main commodities, for example soy, capital inflow will be really strong. Last year, the entity headed by Martín Redrado was forced to buy in December $1.8 billion to prevent dollar from sliding. Although it's a very exaggerated scene for this moment, these foreign currencies would help BCRA to reduce its intervention in market.

However, there are other factors allowing greater inflow between November and December. The most important one is the rule forcing Retirement and Pension Funds Administrative Bureaus (AFJP, in its Spanish acronym) to repatriate capitals.