Exchange market honeymoon ends with US dollar surge

The informal 'blue dollar' exchange rate increased by AR$70 over the course of Monday after holding steady for a month

Hundred dollar bill. Money isolated on white background. American cash

The blue or informal US dollar exchange rate increased by 70 pesos on Tuesday to AR$1120 — the first significant surge in a month, ending an exchange rate honeymoon during which the greenback’s value stood steady. Meanwhile, the financial exchange rates have steadily increased since the end of 2023.

The financial MEP and the blue-chip swap rates —the implicit exchange rate for purchasing and then selling national sovereign bonds— went up by 24% and 37% respectively since December 27, when they “woke up” after being relatively steady, ending on Tuesday at AR$1193 and AR$1160.

The different exchange rates, some of the most-watched indexes in the Argentine economy, had been steady after the government devalued the currency by 54% taking the official exchange rate to AR$800. Economy Minister Luis Caputo said that the crawling peg — the rate at which the peso depreciates compared to the US dollar — would be fixed at 2% a month.

With the retail official exchange rate at AR$859, the exchange rate gap — or brecha — with the blue exchange rate is 30%.

Varied explanations have been put forward for the end of the so-called exchange rate honeymoon — called a “veranito” (Spanish for “little summer”) in Argentina. Presidential spokesman Manuel Adorni claimed that the increase was due to political disagreements over Milei’s mega-decree and his extensive “omnibus bill.” 

“The rumors of disagreement on some points of the [omnibus] bill and the injunctions against the decree within the framework of the legislative debate that begins today, generated that the financial dollars in a few days jumped from 900 to 1,200 pesos,” he said in his daily press conference on Tuesday.

Together, Milei’s mega-decree and omnibus bill deregulate different sectors of the economy, attempt to give the president the ability to legislate without having to resort to Congress, and greatly modify the country’s administrative make-up.

However, consulting firms and economists disagree with the government’s political explanation, offering economic causes for the phenomenon. On Friday, the Ecolatina consultancy cited record-high inflation as a key reason behind the surge in a report called “The expected exchange rate noise.” Buenos Aires City’s inflation rate for that month was 21.1% according to an official report published on Monday. Consulting firms place the December price hike for the whole country at between 25 and 30%. The official number will be published on Thursday. All in all, according to Ecolatina, a 2% monthly crawling peg seems far from enough to avoid an exchange rate lag, i.e. an over-appreciation of the peso.

The Central Bank’s decision to decrease the benchmark interest rate also acts as an incentive for Argentines to dollarize their assets. The yearly interest rate for fixed-term deposits has been 110% since December 20, well under annual inflation. “The strikingly negative level of the interest rate in real terms could generate a further drop in money demand,” Ecolatina’s report says. 

Moreover, net reserves are still historically low, although the Central Bank has been buying dollars due to the devaluation and reduced importers’ access. On Tuesday, the Central Bank had a positive net balance of US$73 million — the lowest since the devaluation.

That is not the only problem lurking ahead. First, the increase in the brecha could gradually take incentives away from exporters to sell their dollars to the Central Bank. Second, from mid-January onwards, payments for imports postponed with the system change will begin to have a greater impact. “[This] could generate a sort of bottleneck, abruptly raising the demand for foreign currency,” the report said.

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