What made the dollar rise: market hypotheses after the Miley government’s worst financial week to date

As usual in financial markets, doubts simmer about the progress of investors’ rates, but when they adjust, they adjust all at once. The most experienced traders, forced by countless twists and turns in the ever-volatile Argentine market, are rehearsing their posterior hypothesis of dollar growth although most admit they didn’t expect it.

Experts consulted by this publication and market reports acknowledge some surprise at the sudden change in tone, but in a post-mortem they prefer to list the variables they believe drove the free dollar up to 25% before a slight decline in those indicators. watch.

The various explanations have common features. And they revolve around two axes: one has to do with the government’s monetary policy and the management of base rates, and the other has to do with the president’s difficulties. Javier Miley (drafts of the Basic Law plus a financial package) in the country’s Senate.

Moreover, it is normal that they explain that there is no one reason, not one, that outweighs the others. Although maybe one of them worked as a trigger, as a trigger.

The Portfolio Personal Inversiones (PPI) report suggests “without a clear answer, shuffling the various hypotheses we have about a strong rebound.” And he listed these reasons:

1. He lower rate of spread could begin to dissuade exporters from liquidation due to the much lower cost of leverage. Given that the 80/20 scheme is still in place, lower liquidation by exporters reduces supply in the financial market by 20%, putting upward pressure on the cash liquidation price in the face of flat demand.
2. Agricultural producers may be speculate on rising prices for soybeans and corn due to floods in Brazil, which delays marketing. Consequently, exporters will have nothing to sell, which will reduce liquidation and therefore supply by 20% through the financial dollar.
3. Some large institutional players they would look into carry trade strategies to lock in profitscreating more demand for cash in settlements and increasing its price.
4. The Senate debates the Basic Law and the fiscal policy package over and over again. They doubt whether the projects will be approved and whether the changes will be relevant. We believe that it is no coincidence that a strong increase in financial dollars occurred in the same week that Miley proposed moving the May Pact to June or July. The government’s most visible anchor is fiscal policy, but without a fiscal package, the sustainability of the adjustment is questionable. In short, the market might begin to take into account the greater likelihood that the government’s plan will not have the expected success.

Salvador Vitellifrom Romano Group said Information who also sees several reasons.

“For me, this is caused by several reasons: a drop in the volume of liquidations to mix; lower rates; and volatility due to political uncertainty,” the economist said.

Reduced export settlements given that the mixed dollar is still in effect, allowing exporters to sell 80% of their dollars on the wholesale market at the official exchange rate and the remaining 20% ​​on the spot market with settlement. Higher exchange rate. The exchange rate reduced the supply of foreign currency in the financial channel, which contributed to an increase in the foreign exchange gap, the specialist explains.

“And finally, the international context also played a role: with the growth country at risk generalized to developing Latin American countries due to US rate hikes. Of course, Argentina has a higher beta, meaning when everyone goes up, we go up even more, and when everyone goes down, we go down even more,” he added.

The bets and subsequent dismantling of carry trade positions were made Argentine peso experiences ‘weakest week since early January’According to consulting firm 1816.

“The sharp exchange rate movement had no clear catalyst. We are inclined to think that this was the market’s reaction to the latest Central Bank rate cut and the delay in consideration of the law on fiscal framework and measures in the Senate,” he concluded in the report.

In particular, Economy Secretary Louis Caputo’s attempt to introduce a new benchmark rate based on Treasury debt securities instead of repos issued by the central bank will require a major effort, the consulting firm said.

“Last Thursday’s Economy Ministry tender went very well, but it didn’t take long for the financial dollar to recover, which could be seen as a warning signal about the limits (or at least the risks) of continuing rate cuts. Overnight. In recent days, it has been observed that these rates (remunerative accounts and sureties) have continued to move in lockstep with the Central Bank’s passive repo rates, which continue to be the marginal rate of the system and therefore also the one that determines the fixed term rate. If the government seeks to replace the monetary policy rate with the Lecap rate, the next step should be to remove the restriction on the issuance of letters in future tenders and perhaps change the fine print of Message A 8020″, they added. .

“Cash on hand is still well below year-end levels in real terms, so on the face of it this should not be a cause for concern from a historical perspective. But We should follow the dollar for two reasons: (i) if the widening gap increases inflationary inertia, it could jeopardize the deflation process and, above all, (ii) if exchange rate volatility affects dollar-denominated sovereign debt. .“, they concluded.