To take advantage of the fall in financial dollars, investors are turning to peso bonds

The decline in the prices of financial dollars has led to a significant increase in the demand for bonds in pesos. Investors have primarily turned to Lecap, which are securities issued by the Treasury for self-financing. This has resulted in a considerable rise in the volume of Lecap traded and, notably, substantial price increases across nearly all maturities.

The rise in rates across all Lecap maturities (between 1% and 1.5%, depending on the term) also indicates a significant decrease in interest rates. This is an important development as it paves the way for the Government to secure cheaper financing in future tenders.

In contrast, interest in Boncer bonds, which adjust their prices according to inflation, has decreased. Prices for these securities plummeted yesterday, with declines exceeding 2%.

Two factors contributed to this situation: the expectation of a low inflation index for July, which is projected to continue declining, and simultaneously, the search for fixed-rate assets in pesos that offer better performance.

Yesterday witnessed significant drops in all financial dollar rates. The MEP (Mercado Electrónico de Pagos) and cash settlements gained attention, closing below $1,300. The unregulated dollar also fell by $20, ending the day at $1,415.

What stands out is that investors are beginning to align with the message of the Economy Minister, Luis Caputo. He indicated that, due to the no-emission policy implemented by the Government, the peso is set to become a scarce currency. “The dollar will eventually decrease, as we will need to sell to fulfill tax obligations,” was his assertion.

Lowering financial dollar prices did not come without costs. Economist Fernando Marull estimated that the Central Bank (BCRA) has already sold around USD 280 million from its reserves in the Contado con Liquidación (CCL) so far in July, actively engaging in financial markets.

Financial dollars have already experienced a drop of over 10% since their peaks at the beginning of July. The decline in the unregulated dollar was less pronounced, but there is a possibility that this discrepancy may narrow or vanish entirely.

However, the decrease in financial dollars did not occur without motive. Economist Fernando Marull noted that the Central Bank has sold approximately USD 280 million from its reserves in the CCL throughout July, which reflects their active intervention in financial markets.

On a positive note, recent sales have decreased to minimal levels, dropping below USD 10 million per day.

However, yesterday the Central Bank saw a significant sales balance in the official market, amounting to USD 124 million, with gross reserves declining by USD 175 million.

The Government is achieving the goals set when announcing the beginning of “phase 2,” characterized by a zero-emission policy. The decline in financial dollars was a crucial objective for the Economy Minister, even at the expense of further weakening reserves, as is currently occurring.

As a result of yesterday’s events, the balance of intervention for this month turned negative at USD 88 million, potentially marking July as the second consecutive month in the red.

This presents the primary cost that the Government must bear to achieve a reduction in financial dollar rates and the exchange rate gap, which currently stands at 35%. The weak balance of exchange rate intervention is further influenced by the so-called dollar blend, allowing exporters to sell 20% of the money they liquidate directly through the CCL.

This situation leads to a lower supply of foreign currency, while the purchase of dollars by importers is becoming more typical. In this context, it is nearly impossible for the Central Bank to accumulate dollars, at least in terms of the trade surplus.

However, the current focus is on continuing to lower financial dollar rates and subsequently accelerating the process of inflation reduction. The implementation of “phase 2,” which completely halts money issuance, aims to hasten this disinflation process while also facilitating the removal of exchange rate restrictions.

The Impact of Falling Financial Dollar Prices on Investment Strategies and Bond Markets

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Strong Increase in Demand for Lecap Bonds

The fall in the price of financial dollars has prompted a notable surge in demand for bonds denominated in pesos. Investors are increasingly gravitating towards Lecap securities, which are issued by the Treasury for self-financing. This shift has resulted in a significant increase in the volume traded across different terms and marked price increases.

The rise in interest rates for all Lecap terms, ranging from 1% to 1.5%, indicates a substantial reduction in borrowing costs. This development is relevant because it potentially opens doors for the government to secure cheaper financing in upcoming bond tenders.

Market Sentiment Towards Boncer Bonds Deteriorates

In contrast, investor interest in Boncer bonds, which adjust in price according to inflation rates, has waned. Recently, prices of these securities saw declines exceeding 2%. Factors contributing to this downturn include expectations of a low inflation index for July and a trend towards fixed-rate assets demonstrating better performance.

Market Reactions to Financial Dollar Movements

A significant decline in financial dollar prices was evident, particularly in the context of the MEP (Mercado Electrónico de Pagos) and cash settlement markets, which closed below $1,300. Additionally, the free dollar depreciated by $20, ending at $1,415.

“Lowering the price of financial dollars was not free. Economist Fernando Marull estimated that the BCRA has already sold some USD 280 million of its reserves in the CCL so far in July, that is, intervening in the financial markets.”

Investor Psychology: Aligning with Government Policies

Investors are beginning to align with the message from the Minister of Economy, Luis Caputo. He emphasized that the government’s zero-emission policy would render the peso a scarce currency, predicting that “the dollar will end up falling since we will have to sell to pay taxes.”

Financial dollars have dropped over 10% since reaching peak levels at the start of July. While the free dollar’s reduction was less pronounced, the gap may close as economic conditions evolve.

Central Bank Interventions and Their Effects

The recent fall in financial dollar prices can be attributed to interventions by the Central Bank (BCRA). Economist Fernando Marull noted that approximately USD 280 million of reserves have been sold through the CCL (Contado con Liquidación) in July. However, in recent days, these daily sales have tapered off to below USD 10 million.

Despite this, the Central Bank recorded a substantial sales balance in the official market yesterday, amounting to USD 124 million, resulting in a net reserve drop of USD 175 million.

“The Government is achieving the objective it had set when announcing the start of ‘phase 2’, characterized by the zero emission policy. The fall of financial dollars was a central part of the Minister of Economy’s objectives, even at the cost of greater reserves weakness.”

Debt Management and Currency Stabilization

As of now, the intervention balance for July stands at a negative USD 88 million, highlighting the potential for the month to conclude in the red for the second consecutive time. This cost is essential for achieving reduced financial dollar rates and addressing the ongoing exchange rate gap, currently at 35%.

The Central Bank faces challenges in accumulating dollars, particularly concerning trade surpluses. This situation has been compounded by regulations allowing exporters to sell 20% of their liquidated amounts through the CCL, leading to diminished foreign currency supply.

Targeting Financial Dollar Reduction and Inflation Control

Despite the hurdles, the primary aim remains the consistent decrease of financial dollar rates and accelerating inflation control measures. The implementation of “phase 2”, designed to halt money issuance, is pivotal for this disinflation effort and a pivotal exit strategy from currency controls.

Practical Tips for Investors

• Monitor Economic Indicators: Stay updated on inflation projections and financial dollar movements to make informed investment decisions.
• Diversify Investments: Consider diversifying across different asset classes, including Lecap, Boncer, and other bonds.
• Follow Government Policies: Pay attention to announcements from the Ministry of Economy as they can significantly impact market dynamics.
• Stay Informed: Keep abreast of Central Bank interventions and their implications on currency stability and investment opportunities.

Conclusion

Investors in Argentina are adapting to a rapidly changing economic landscape characterized by declining financial dollar prices, increasing demand for Lecap bonds, and shifting sentiments towards inflation-indexed Boncer bonds. The evolving policies of the government and the Central Bank’s interventions will continue to shape market conditions and investment strategies in the foreseeable future.