Surprising beginning of 2019: how the decline of the dollar declines?

Early 2019 is very similar to 2018. Exactly a year ago, the government put $ 9 billion in bonds at the lowest dollar rate in history. It lasted a few weeks. By the end of January, an adjustment of rates in the United States began and the flow of funds changed, which began to emerge from emerging markets. What happened next is already known: a mega-valuation, IMF bailout and the highest inflation since 1991.

This year also began with optimism in the financial markets. The country risk fell from 830 points to almost 700 points. As a result, bonds went from 14% per year in dollars to less than 12%. Another key variable that reflects this better climate is the US dollar: almost one peso fell in just eight business days, and in the last two days it pierced the floor of the "nonintervention zone."

The wholesale exchange rate closed the week at $ 36.90, to 55 cents below what will be the opening of the trading session on Monday, set at R $ 37.45. This lower limit is adjusted at a rate of 2% per month. By the end of March, therefore, the dollar should be trading at at least $ 39.38, closer to $ 40 than the current $ 37.

The model chosen by the Central Bank and the IMF to stabilize the foreign exchange market and reduce inflation expectations is working according to plan. The "monetary tightening" consisted of tight control of the amount of money in circulation and a sharp jump in interest rates. Both simultaneous effects were aimed at bringing the dollar to the ground of the non-intervention zone. And that's exactly what happened.

Now the model entered the "phase 2", that is, a dollar that pierced the floor of the exchange band and leads the Central Bank to support it. The entity bought $ 60 million between Thursday and Friday, but failed to curb the currency's decline.

Taking into account the last episodes of devaluation suffered by Argentina (in 2014 and 2016, for example) Concern about the return of the exchange rate lag is not exaggerated. It is not by chance that the scheme designed with the IMF established a "tablita" with a daily adjustment to establish the floor of the dollar. The logic behind this scheme is precisely not to delay the dollar to contain inflation artificially in an election year. As it has always been done in Argentina.

The government has two allies: the strengthening of the real in Brazil since Jair Bolsonaro won and the weakness of the dollar in the world, given the possibility of the Federal Reserve (EDF) postponing interest increases. Both elements lead to the exchange rate maintaining a certain competitiveness, even if it remains or decreases. The problem is that inflation maintains its inertia and also threatens to "eat" that gain in competitiveness.

The index of the multilateral real exchange rate is now at 115 points. It is almost 18% lower than the result of the August devaluation, when the dollar surpassed the $ 40. But the subsequent inflation and the retraction of the currency practically evaporated that gain.

The multilateral exchange rate was in April, just before the beginning of the exchange rate, by 90 points. This implies that the dollar in real terms is still almost 28% higher than nine months ago. The challenge now is to preserve this competitive improvement, that is, not to delay the exchange rate again.

Among economists, the debate has begun on what would be the best formula for aligning the dollar with the floor of the "non-intervention zone." That same question is already installed in the economic team. Guido Sandleris prefers to go in slow motion; is finally a trial and error game, since this is a new scenario for Argentina.

Going out to buy dollars allows the BCRA to accumulate reserves and prepare better for the months leading up to the presidential elections. But at the same time, it implies the injection of pesos, which, if exaggerated, could generate a recovery of inflation. This is what happened between 2005 and 2007: the defense of a high exchange rate ended in a megaexpansion of weights and a resurgence of inflation, which could not be controlled until now.

Another option is to induce a much faster fall in interest rates, which has barely moved this week, from 59% to 58.5% Annual in the case of Leliq. The rate reduction may be faster, but it also poses a danger. If savers do not feel more satisfied with what banks pay for their fixed terms, they could quickly return to the dollar and raise it well beyond the band's floor.

The other alternative is to reduce reserves for banks, which are at record levels. In this way, part of the weights that are "retained" will be released, but they help the Central Bank meet its zero emission target. Therefore, it is not easy to alleviate this restriction.

The scenario for the next three months could accentuate the trend of these first days of 2019. The accumulation of dollars by the public and by the companies has been reduced to the minimum expression. The deficit in the trade balance also fell sharply and commercial red would become a surplus.

The wheat harvest was better than expected and would contribute $ 3 billion by March. Then the soybean crop will come (which also comes as expected) and also the Treasury has a good amount of surplus dollars that should be converted into pesos.

The absolute priority of the government is to reach the October elections without big surprises of the dollar. It requires a stable, little-moving exchange rate to reduce levels of uncertainty and change the widespread moodiness after a terrible economic slowdown.

In these days, the debate will revolve, if it is convenient to accelerate the reduction of the rates. The advantages – at least apparent – would be twofold: boosting the dollar a bit and at the same time giving relief to SMEs, afflicted by a lack of credit, a sharp increase in the cost of money and a drop in sales.

With an expected inflation rate of 30%, a rate of 58% per year seems unreasonably high. In addition, everything will be in slow motion. The memories of 2018 are still fresh. It all started when then Central Bank President Federico Sturzenegger agreed to lower rates after Casa Rosada decided to change inflation targets. It was the beginning of a long road of mistakes that ended in a collapse that will take a long time to rise.