U.S. multinational financial services firm JPMorgan recommended that investors participate in short-term carry trades in Argentina after the administration lifted several capital restrictions for individuals and companies this week.

“We favor short term [foreign exchange] carry trades over longer-duration positions,” said the report issued on Tuesday. They also recommended buying LECAP Treasury bonds maturing in August.

The news comes on the heels of the administration’s US$20 billion deal with the International Monetary Fund (IMF) confirmed last week. The first disbursement, which amounted to US$12 billion, entered the country on Monday.

“The substantial upfront liquidity support provides a muscular entry for the bold policy pivot embedded in the new IMF [deal], which continues to be underpinned by a credible commitment to strong fiscal discipline,” the report said.

The government also changed its exchange rate policy from a 1% monthly depreciation of the peso to a currency band scheme, meaning that the dollar is now floating between AR$1,000 and AR$1,400. If it falls outside this range, the Central Bank can buy or sell dollars to keep it in line.

JPMorgan called the new regime “a game changer for local markets” that “warrants a more bullish stance.” 

“We believe the new arrangement can stabilize [foreign exchange] expectations ahead, with the top band acting as a credible backstop amid a solid reserves boost,” they added.

Carry trade entails using U.S. dollars to buy peso-denominated debt, then buying back more dollars with the profit once the credit matures. Those operations are attractive when the bond’s interest rate exceeds the devaluation rate.

The risks for this new scenario

After Economy Minister Luis Caputo said in an interview last month that the administration could change the foreign exchange scheme, investors started dollarizing their portfolios as uncertainty lingered over the profitability of carry trading. However, according to JPMorgan, the announcement of the new scheme has changed expectations.

“The risk-reward appeal of carry trades has considerably improved, with high yields on short-term instruments, likely tight local liquidity conditions ahead and the top band acting as a backstop to potential [exchange rate] depreciation,” the report said.

On Tuesday, the Central Bank announced that foreign investors will be allowed to access the official exchange rate market. However, they added a minimum parking period of six months, meaning that investments made now can only be cashed out after the mid-term elections. Foreign investors can still access the markets through the blue-chip swap.

JPMorgan’s report put the elections as a risk. “The typical risks associated with legislative elections, scheduled for October 26, could also prompt locals to preventively dollarize, increasing volatility around that date,” the report said. “There is also the potential for elections to be a bullish catalyst for Argentinian assets, but risks around it seem less asymmetrical to the upside for local than for credit,” it added.

The report also listed some other potential risks, such as a potential difference between the blue-chip swap and the official rates, although they expect “a close to null gap.” They also said there is a “potential for temporary inflationary pressures” stemming from the new exchange rate.

“The most prominent risk at this point remains additional stress from the external backdrop, as U.S. and global recession risks continue to lurk ominously,” the report said.

Despite these caveats, however, JPMorgan’s position regarding Argentina’s external debt is “over-weight.” This means that they are recommending investors hold on to a large amount of the country’s debt instruments in their portfolios.