According to Ecolatina, the increase in the Federal Reserve interest rate (by 75 bps) implied an expectation “of less future monetary tightening (either through smaller rate hikes and/or a shorter duration and magnitude of the tightening compared to what was expected). This impacted this week in most world indices and, particularly, in emerging countries such as Argentina, while soybeans reacted upwards (“in the same way that commodities are affected by the FED’s rate hike and due to expectations of an economic slowdown, when the outlook is reversed they tend to respond upwards”).
2. rate hike
According to the consultant, “the wind in favor of the external front was combined with a considerable reaction in terms of interest rates at the local level.” In this way, the Treasury validated effective rates of 90% in the last auction for nominal instruments. The BCRA under a new monetary policy scheme (“the corridor”) accompanied the rise, taking the Leliq to 80% TEA.
In addition, although the BCRA did not renew all the maturities in Leliqs in the week, it considerably reduced the amount it allowed to mature compared to last week. This gave a signal to the market that it not only reacted with a rate hike to calm the financial dollars, but that it would stop prorating Leliqs. Why is this important? It implies that it would suck up all the excess liquidity necessary to prevent those pesos from putting pressure on the foreign exchange market.
“The expectation that said liquidity (and that which is necessary in the future to finance the Treasury or sustain the sovereign debt in pesos) will be absorbed makes it possible to reduce expectations of greater exchange rate pressures (immediately, although not necessarily in the future)” analysts said.
3. political signs
The free dollars showed a very high volatility in the month of July. Unleashed the macro-financial crisis, both the CCL (GD30) and the MEP (AL30) and the blue reached nominal historical maximums days ago of ARS 332.5, ARS 324.9 and ARS 338.0 respectively. However, with the local and international events mentioned, added to the rumor of the arrival of Sergio Massa at the Ministry of Economy (now confirmed as “Superminister” despite the fact that he does not lead energy, BCRA or AFIP for now), financial dollars fell sharply: they all pierced downwards the $300 barrier.
Thus, the CCL closed the month at ARS 287 (still posting a +14% monthly increase), while the MEP ended July trading ARS 275.5 (+10% m/m) and the blue at ARS 296 (+ 14% m/m). For their part, the gaps between the free dollar and the official dollar also showed strong oscillations in the month: while that of the CCL reached 157% on 7/21 (the Blue and MEP touched 160% and 149% on the same week), they end the seventh month of the year at 119%, 126% and 110% respectively. Thus, despite the recent decline, the gaps advanced +18% (CCL), +39% (blue) and +10% (MEP).
Dollar: Will there be devaluation?
For Ecolatina, the devaluation of the exchange rate is a key factor to take into account. Going forward, he estimates that devaluation will not come, where the official dollar would run on average at +5.1% per month until the end of the year and would end around ARS 165 on average in December. Why? Despite the extreme exchange rate tensions, all the measures aim to avoid a devaluation.
One, stand out is the so-called “soy dollar”. For the consultant, the incentive for producers to liquidate brings with it a limitation to access the financial dollar for 90 calendar days and, in addition, increases their exposure not only to the risk of the BCRA but also to that of the Treasury.
Finally, Ecolatina understands that a devaluation with a nominal value launched at 6%-8% per month with a BCRA that, according to market estimates, would have a position sold in futures for more than USD 7,000 M (the highest since 2015) and without a strong fiscal or reserve anchoring, the devaluation would only accelerate the nominal dynamics. Specifically, this is the path we envision in the Pessimistic Scenario, where a modest jump (it would average $195 at the end of December) boosts the economy’s nominality and pushes inflation comfortably above triple digits by year-end.
