Argentines and the US dollar have a very special relationship and have come to know what to expect from each other. For instance, people in the country are fully aware that it is highly likely that the currency will go up in the days leading up to any national election.

This is exactly what has been happening in the last month in anticipation of Sunday’s primaries, as the informal exchange rate (commonly known as the “blue dollar”) has gone from AR$495 to AR$602 — a 21.6% increase in 30 days.

Within this scenario that Argentines are so used to, however, a lingering question remains: why exactly does this happen? And does this specific surge have any special characteristics?

“The ‘blue’ or parallel exchange rate is a true reflection of the market’s uncertainty regarding the economy,” Juan Ignacio Paolicchi, chief economist at Empiria Consultores, told the Herald. “It’s like a sounding board.”

Said uncertainty, according to Paolicchi, is due to the fact that options in Argentina are “black or white,” with little continuity between different governments. 

“The pressure to dollarize a portfolio is usually higher. Investors and savers usually want to get to the elections ‘lighter’, positioned in a more secure asset.”

Pablo Repetto, Head of Research at brokerage firm Aurum agrees. “In Argentina, the US dollar is a refuge of value, as Treasuries [government debt instruments issued by the United States Department of the Treasury] are in the USA.” This is not surprising — due to its loss of value, anyone who has betted on the peso over the last 30 years has lost to the US dollar.

Investors and funds run to the US dollar not only during election times — according to the National Institute for Statistics and Census (INDEC) there are approximately US$261.4 billion “under the mattress,” or outside the banking system. Informal exchange houses — cuevas, Spanish for caves— and street “blue” dollar sellers — arbolitos, Spanish for “little trees” — are a persistent part of Buenos Aires City’s landscape.

The simplest explanation is that high demand for the US currency makes its price go up. However, this election has its own set of particularities.

According to a report by the 1816 consulting firm, the market began forecasting there were higher chances of a post-primaries jump in the exchange rate (a devaluation) due to last month’s statement by the International Monetary Fund (IMF), which conditions the upcoming US$7.5 billion disbursements to “agreed policy actions” which have not been entirely specified.

Another report by consulting firm Anker said that “the fragility of liquid reserves means that the IMF has leverage to impose measures that would have been difficult to imagine in the middle of the electoral process.”

The “blue dollar” is not the only exchange rate that has been consistently going up in the last few days. The official exchange rate —  AR$286.19 at the time of writing — has gone up 3.6% over the first 10 days of the month, hinting that the Central Bank is accelerating the crawling peg (the progressive and controlled devaluation strategy the government is implementing.) Meanwhile, financial exchange rates have also gone up over the same time period — the MEP increased 4% to 529.82 while the blue-chip swap rate rose 6.9%, to AR$598.7.

This anxiety can also be seen in the rise of the implied interest rates for August and September future dollar contracts. In both cases, the annualized interest rate exceeds 500%, assigning more probabilities to a devaluation of the peso in September.

However, 1816 said that “politically speaking, we would be very surprised to see a devaluation now, but if it happens it will be because the government has run out of alternatives.”

The tension not only comes from the IMF, but also from Argentina’s record-low international reserves — net reserves are currently at negative US$10 billion —, soaring inflation, and increased restrictions on US dollar bonds imposed by the National Securities Commission. The government has not only restricted access to US dollar bonds, but this week it also raided “cuevas.”

According to Repetto, this election has two other peculiarities, one of them being the “atomized” electoral offer and the need to correct extraordinary imbalances “could lead to a very turbulent transition.”

The other factor  — which consulting firms agree with — is that the market perceives we could be at the doors of a monetary-exchange market regime change without many certainties.