After the most turbulent week in recent months, these are the economic and financial variables that the market should closely monitor
By Juan Pablo Albornoz
01/05/2023 – 08,29hs
The most hectic week in exchange matters for the Massa management ends. The blue dollar ended April at $469, having flirted with $500 last Wednesday. The gap with the official threatened to exceed 120%, a warning sign for the Government.
The room for maneuver is more limited and the economic policy took note that it must act faster. The combination of a new “supertasa” and an artillery of intervention in the financial dollars with the guarantee of the Fund stopped the escalation of the exchange rate.
Economy made it clear that the exchange rate gap, the key variable of the “Getting Plan” to August, cannot escape beyond 120% because from there the economy is paralyzed. There is a crucial difference: the nominal runs at 7% per month and the transfer to prices of an exchange jump like the one last week is immediate. Possibly in terms of expectations we have the bad news this week.
Then the economic and financial “traffic light” of the week:
Red lights: REM and future dollar
Friday will be known Survey of Market Expectations (REM) who makes the Banco Central. In the REM for March, the market average forecast annual inflation of 107% for 2023 and a monthly average of 6.1% for April, May and June. March inflation was 7.7% (+9.3% food) and high-frequency private measurements before the currency run did not drop below 7%. Possibly increase the expectation of inflation.
The times for updating prices in the economy are shortening and distributive tensions will increase in wage negotiations. These tensions will have their correlate in prices. In turn, the expected devaluation will probably increase after a week in which the BCRA accelerated the rate of depreciation to 8.2% per month.
The implied rates of the official dollar futures contracts continue to skyrocket. The market assigns more chances to a discreet jump in the official exchange rate in the short term. It is not the first time that this has happened under the current administration, but it is the first time that it has been combined with an election year that suffered a very strong cut in the supply of foreign currency.
The “agricultural dollar” is still lame and there are no news on the exchange front that could bring oxygen to some liquid reserves that are at the minimum level of current management. A substantially higher hedging cost added to devaluation and inflationary expectations that will probably be corrected upwards will impact prices.
Yellow lights: deposits and collection
Between April 11 and 25, the private sector withdrew US$528 million from deposits in bank dollars, the largest outflow since December 2021 for a period of 10 business days. The stock of private deposits has fallen by more than US$3.8 billion since 2020, but the current management minimum is still US$1.0 billion higher. The big difference from previous lows? The level of liquid reserves, a prospect of currency supply cut short by the drought and an already absolute deviation from the goals agreed with the IMF that impatient depositors.
The report of April AFIP collection will be crucial for the analysis of the fiscal situation. In March the fiscal red deepened, mainly due to a strong contraction in the income that the treasury obtains through export and import duties. A new setback in the collection will force the government to speed up the adjustment of public spending to avoid a deepening of the deviation from the goals agreed with the Fund.
Green lights: FED and dollar?
This week the Federal Reserve Monetary Policy Committee (FOMC) meets to decide whether to raise the interest rate (Fed Fund Rate). Economic activity slowed down and the labor market showed signs of cooling off (particularly unemployment claims), but inflation continues to bring headaches. The market is pricing in a 25-point hike that would take the rate to the 5.00/5.25 range.
Why the green lights? Everything indicates that we are closer than far to the end of this cycle of rate increases, a relief for the second half and 2024. However, there is an asterisk. The market discounts the Fed lowering the rate twice before the end of the year. The Fed did not validate this expectation in its latest projections. If inflation does not abate and the slowdown in economic activity is not as pronounced, the market could be in for a negative surprise.
With a sharp rise in rates and intervention in financial dollars, the government managed to interrupt a dangerous dynamic in which free dollars were beginning to enter. Cash with liquid closed around $453 and the MEP below $437. The exchange rates may have some oxygen in the first days. The news that the Government can bring in exchange matters will be crucial (liquid reserves are at their limit), whether or not the withdrawal of dollar deposits will continue and whether or not the soybean dollar settlement improves. Green light in the very short term… but be vigilant.
Juan Pablo Albornoz, economist
