6 reasons why the exchange rate began to collapse | Accelerated dollarization of peso assets
He The market provided another example of the speed at which it is losing optimism. He blue dollar jumped this Wednesday 45 pesos and closed at 1275 pesos. Meps saw an increase of 5 percent to P1,230, while cash with settlement rose another 5 percent to P1,256. He country risk closed at 1400 points due to a sharp fall in foreign exchange securities, which lost more than 6 percent.
The appreciation of financial dollars, the recovery of government bond prices and the dynamics of stocks remained in the shadows. rope in less than a week. Since Monday, dollar prices have been trading on the stock market and the blue dollar has started to rise sharply. This was added last day of collapse of Argentine companies registered in New York and foreign currency sovereign bonds.
It’s kind of launch of attack on Argentine assets, which cannot yet be called chaotic (due to the strong growth of stocks and bonds in recent months). However it shows financial instability of the country. The government’s logic that fiscal adjustment, reduction in money supply and the implementation of liberal policies have restored hope to investors is beginning to look ridiculous.
The financial situation of recent days shows the ability of the market to mark the field for the economic team. In particular, the agricultural sector is trying to point out that the official exchange rate appreciation may not be permanent, while investors who have been carrying trades in recent months confirm that they are short-term players. The lack of emphasis on production and the real economy is striking.
Among the factors explaining the return of currency pressures in the city of Buenos Aires are economic but also political elements. Miley’s government called for an agreement with the governors on May 25, a few days before the meeting. did not receive provincial support to show control. At the same time, the government is adding local and international enemies, among which an incomprehensible episode of the struggle with the front office of the Spanish executive branch stands out.
Of course, purely macroeconomic elements are added to this political situation, which begin to create uncertainty and encourage hedging, safe-haven and dollarization decisions. At least 6 of these economic factors can be identified:
1. Interest rate: The recent cut in the Central Bank’s benchmark interest rate to 40 percent of annual nominal interest has increased dollarization. This monthly rate of less than 3 percent is insufficient in the face of inflation, which reached nearly 9 percent in April and is unlikely to fall below 6 percent in the coming months.
2. International reserves: Central Bank reserves present worrying signs. Many of the newly purchased dollars have added to foreign debt owed to importers, a maneuver that appears to artificially inflate net reserves by increasing debt.
3. Budget surplus: Although the government posted a budget surplus in the first quarter of the year, it did so by cutting pensions, public works and other items, measures that many analysts consider unsustainable in the long term.
4. Economic activities and tax collection: The decline in economic activity and declining tax collections are making it increasingly difficult to maintain a primary surplus.
5. Exchange rate and yield calculation: The agricultural sector believes that the official exchange rate is overvalued and this is delaying the eradication of crops. This has led to a reduction in the supply of dollars in the foreign exchange market, indicating the sector’s commitment to devaluation.
6. Stock of weights: Although the government succeeded in reducing the number of pesos in circulation, monetary aggregates doubled in dollar terms. This suggests that loosening foreign exchange controls could trigger a currency flight, and no one wants to be the last to purchase foreign currency.
These elements appear to increase financial uncertainty. What started with a rise in the dollar continued this Wednesday with a collapse in Argentine stocks in New York and a sharp fall in sovereign bonds. There were energy companies and banks that lost nearly 7 percent in dollar terms on the day, and some securities fell more than 6 percent. Country risk, which a few weeks ago was approaching 1000 points, was now a few points away from exceeding 1400 units.