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The dollar as the head of the election campaign

With a "pressed" ticket waiting for PASO, analysts believe that BCRA will be able to avoid the upheavals until the elections in October

Both political analysts and economic and financial analysts agree that the dollar has become a virtual boss

electoral campaign of the ruling party,

after eleven consecutive weeks of peaceful exchange without

Central bank

should intervene in sales on the market.

Both estimate that the "ironed" rate – and falling, from the peak of 46 USD at the end of April to less than 43 USD now – is one of the factors necessary to increase the chances of re-election

Mauricio Macri,

however, it is not enough to explain the current uncertainty about the result of polarized presidential elections on 27 October. For example, political scientist Andrés Malamud believes – in the report from the IDEA magazine – that the triumph of Macri depends mainly on maintaining a stable equation of division of the dollar by the Peronists.

In favor of this change in economic sentiments, which initially begin to reflect some voting intentions, there are also recent slowdown in inflation due to excessive monthly levels at the beginning of the year, freezing tariffs and incentives for consumption prepared by the government (Anses Loans, now 12 plans in installments without interest, subsidies for the purchase of cars and motorcycles, etc.). Hence the reflection of qualitative indicators developed by the University of Telel (UTDT), as an indicator of consumer confidence (which increased between 18% from May to June, from 34.4 to 40.6) and confidence in the government (+ 22%, from 1.53 up to 1.86), although far from the tops, respectively, 51.1 and 2.97 from November 2017.

Although it has not been used in practice so far, the IMF's support for selling BCRA dollars at the end of April was the turning point that led to the current "veranito" in the markets. Then, in June, the announcement of the Macri-Pichetto formula contributed to reducing the country's risk rate (from over 1000 to less than 800 basis points) due to improvement in Argentine bonds and an increase of more than 22% in Merval in dollars along with the wind for markets external. Paradoxically, the Argentine risk has dropped the most during this period (over 200 basis points), but remains the highest among emerging countries. Leliq also dropped from 74% at the beginning of May to 59% annually in the last week and although in real terms remains high in the face of monthly inflation, it favored the introduction of short-term currencies (
carry trade) take advantage of these high profits.

When the dollar stabilized and fell (wholesaler fell by 9.3% in two and a half months), demand for foreign currency to accumulate money increased in the second quarter of the year (up to 7000 million USD according to unofficial estimates), but took part in it planned Treasury sales (USD 60m per day) and liquidation of record collections (USD 6528m) without the need to sell provisions by BCRA.

However, the current calmness on the stock market may change in less than a month, because it is largely dependent on the result of the presidential PASS on August 11. Not so much because of the possibility that in this virtual pre-election survey the opposition formula of Fernandez-Fernandez was imposed, but due to the scale of possible difference in relation to the ruling party, which would accentuate the typical dollarization of portfolios before each choice.

To this extent, the markets expect the last monthly cycle economist Miguel Ángel Broda to develop two alternative scenarios of supply and demand behavior in dollars in the second half of the year, according to the hypothetical PASO result. First, assuming a difference of no more than 6 points in favor of the opposition binomial, which can be reversed in the first or second round according to the official formula. And another with an advantage of more than 6 points, which would complicate the chances of Macri-Pichetto.

In the first scenario, Broda calculates that the surplus of demand on the currency market will amount to USD 11.3 billion (because only those intended for collection would increase to USD 17.8 billion in the second half of the year from PLN 11.8 billion in the first). And in the face of a slight decline in private supply due to a reversal
carry trademay be covered by the sale of BCRA provisions for USD 4,800 million, and the State Treasury for PLN 6,600 expected by the end of the year. According to this hypothesis, he predicts that the exchange rate will fluctuate in the range of 45/48 USD and will close the year one step higher.

The second, in turn, predicts a larger decline in the private offer (up to USD 24,200 million compared to 29,000 million in the first scenario) and an excess of demand that could almost double (to USD 21,500 million due to increased collection). This imbalance would force BCRA to aggressively intervene in the market, with sales exceeding USD 10 billion, in addition to those that will be on behalf of the Treasury and higher dollar growth. This would prevent a new currency crisis before the elections, albeit at the expense of reducing its net reserves, which currently amount to almost USD 19,000 million, plus another thanks to swaps from China.

For now, the consensus of analysts is leaning towards the first scenario, including the triumph of Macri. The market expectation (REM) survey, collected by BCRA in June, predicts that the nominal exchange rate will reach USD 46 in August, and in October it will reach 48.8 in October, reaching USD 50.2 in December, at the Leliq rate of 55% per annum. This forecast is in line with the dollar under control, after nine months of unprecedented zero expansion of the monetary base with its correlation with high real interest rates.

Nevertheless, the official priority of stabilizing the dollar in the short term and avoiding shocks to the election, pushes further problems in the post-electoral future. One of them is the increase in stocks of pesos in Leliq, which, as described, can be reduced only by combining a steady drop in inflation and a greater demand for pesos. Another is the initial deterioration of the multilateral real exchange rate (TCRM) weighted by the basket of currencies, which includes the dollar, the euro, the Brazilian real and the Chinese yuan. According to the BCRA daily index, TCRM is currently 23.8% below the peak at the end of September 2018 (Prior to monetary policy based on zero expansion and flotation within the exchange band) and 17.7% above April of the same year (before the exchange shock ). This means that REM forecasts (which predict a correction by almost 22% by the end of the year) are discounting the upward decline in order to correct this delay.

As another proof that the dollar has become the key axis of election speculation in the markets, the Rosario consultant report, Salvador Di Stéfano, called the "scenarios" as "Alberto dollar" and "Mauricio dollar". In the first case it is anticipated that if Cristinismo wins and sets the exchange rate, the "blue" dollar may turn to about 78.43 USD by the end of the year, and those who invest today in this currency will receive a 78% return in less than six months In the event that Macri wins and negotiates an extended contract with the IMF, the analyst expects an abundance of external credit and a program that anchors the exchange rate, which may generate significant profits in pesos and improve the parity of long-term external bonds.

In the midst of extreme political polarization, each of these speculations – with a greater or lesser technical degree – is predictable, which can happen with dollars after the election. They can have an impact on the campaign, but they are not good news for the future of the economy, which in 2020 will need a comprehensive stabilization plan seriously, with structural reforms waiting for years to get predictability, generate productive investments and real currencies, resume growth and reduce poverty.


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