Uncertainty in Argentina is reflected in the USD futures markets

This uncertainty is occurring in the context of a growing trading volume in the market and expected devaluation rates that exceeded 200% per year, while the Central Bank remains on the sidelines.

The government faces a period of great macroeconomic challenges between now and the end of the year; one of them is to manage the devaluation of the Argentine Peso. The Central Bank (BCRA) is currently managing the crawling-peg at a rate of between 6% and 7% per month, a figure that has been running behind inflation since the beginning of the year.

Faced with a shortage of reserves, the central bank has been using bond operations to maintain the financial dollar rate and thus the official rate. However, this comes at the cost of selling bonds at parities below 30%, which translates into yields above 50%.

Market expectations, for their part, are not auspicious and the implicit devaluation rate shows a change in trend in expectations since the last months of 2022 and the first months of 2023. From October to December 2022 they showed a downward trajectory, while from February onwards they returned to an upward path.

Such is the deterioration that, between March and May, the dollar went from trading at $390 to $538 for the December 2023 maturity. As of May 16^th, contracts were traded with a jump in the expected rate between July and August, a period in which the Primary Elections (PASO) will take place and, therefore, of great uncertainty.

To put it in perspective, with an implicit devaluation rate of 200% as of December, a crawling at 16.9% per month would be required, almost 3 times the current rate. The volume traded in currency derivatives has been growing steadily since December, reaching 18.9 million contracts in April, while trading in the rest of the derivatives has been declining rapidly since January, when it reached almost 70 million contracts traded.

Moreover, it should be noted that, despite the pressure from futures, the BCRA has not traded in this market since last December, with a net neutral position, unlike in the previous two years, when it generally held a short position. This means that it is the private sector that is taking positions against the US currency.

The central bank’s reserve may be related to protecting its ability to act in the run-up to a period of high volatility, which will most likely be the next few months.

Source: https://bcr.com.ar/

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