April 22, 2019– Mary Greeley News – In the last week the Government activated the initiatives to limit the movements of the dollar, after confirming a very high inflation of 4.7% in March, to accumulate 54.7% in twelve months.
The high interest rates of the BCRA, a “low” ceiling to trigger the intervention and USD 9.6 billion that the Treasury will liquidate until the end of the year will converge to cushion the upward pressure for the dollar, driven by inflation, the firm demand in times elections and an eventual devaluation of the Brazilian real.
“The completely flat exchange bands, without a slope, could be a sign of real appreciation of the peso in the face of a better anchoring of expectations of devaluation,” said Nery Persichini, Investment Manager of GMA Capital.
The joint work of the Treasury and the Central Bank for this purpose can be summarized in 7 points:
1 – More coordination. Treasury sales and Liquidity Bids (Leliq) are offered almost simultaneously in two rounds: before noon and then before the closing of the exchange market at 15. By supplementing the absorption of pesos by the BCRA and the supply of Tesoro dollars, “grind” at the exchange rate before eventual shocks.
2 – Exchange Band in extinction. The Central Bank set the “ceiling” of the “non-intervention” zone at 51.45 pesos. Faced with inflation that does not drop by 4% per month, it is likely that the dollar will reach that range before October, which will enable the entity to sell up to USD 150 million of its reserves per day, as agreed with the IMF, to mitigate a pre-election escalation.
For Gabriel Caamaño, Chief Economist of Ledesma Consulting, “the BCRA toughens the rule before each new inflation figure that exceeds already bad expectations.” On this occasion, he pointed to expectations of depreciation (of the exchange rate), in an attempt to generate a greater correction or anchoring of inflation expectations, especially on the side of tradable goods and services. ”
3 – Reinforcement of currencies. Although the contribution of the Treasury does not reach 10% of the total operated in the wholesale market, the extra offer for USD 9,600 million until the end of the year, positions the official entity as the largest provider of dollars until the elections. In addition, agriculture will contribute more currencies this year than in the past, when the drought hit.
“As it was in force, the BCRA confirmed that if the dollar operates above the non-intervention zone, it will sell – via auctions – up to USD 150 million per day, in addition to the USD 60 million sold by the Treasury until November,” a report from CEPA (Center for Argentine Political Economy). “Both amounts are still low in relation to the volume operated in a day of ‘run’, although the freezing of the roof of the area would advance the interventions at a price of $ 51.50,” he warned.
4 – Bounded flotation. In fact, the daily sale of USD 60 million of the Treasury is an official selling incursion within the “non-intervention” zone, the strip in which the Central Bank committed not to participate with purchases or sales. This reduces the postulated “free float” for the ticket.
5 – Foreseeable supply. As the currencies that the IMF authorized to sell to the Treasury are not cumulative, the daily sale of USD 60 million is also a signal to the market that there will be available currencies, complementary with the announcement of the BCRA to have a floor of 62.5% for the LELIQ rate, at least for April.
“All the measures of the Central Bank further tighten its monetary stance, the official objective is to reduce inflation, although the tacit goal is to put a ceiling on the exchange rate, the main transmission mechanism at prices in the Argentine economy due to its rootedness and deep bimonetary nature, “observed Persichini.
6 – Neither emission nor absorption. Just as the BCRA guarantees the “non-issue”, in compliance with the Monetary Base of “zero” growth -stabilized at $ 1.34 trillion-, the Treasury’s action does not include “sterilization”: when it sells currencies, it uses the pesos to current spending, therefore they return to the financial market.
7 – Dynamics with costs. The Central Bank “froze” the Monetary Base, but its debt in LELIQ is growing, due to monetary policy interest rates, now at 67.12% per annum. The stock advanced to a new nominal record of $ 1,079,988 million ($ 1.08 billion), while measured in dollars reached USD 25,775.4 million.
The Treasury, in turn, is shedding dollars in exchange for pesos that will be used for current expenses. Afterwards, it will have to stock up again with foreign currency to pay debt maturities, concentrated in North American currency.
credit: In part with https://www.infobae.com/economia/2019/04/21/el-tesoro-y-el-banco-central-coordinan-acciones-para-ponerle-un-techo-al-dolar/