Forex Investment and Currency Trading

In recent days, the USD/ARS moved quickly higher from 3.16 to 3.19 on the heels of strikes in the agricultural sector and concern regarding the prospect for a further move higher. Although the government will likely experience ongoing challenges, the probability of a sharp move higher in
USD/ARS is extremely low in the near term.

USD/ARS has drifted back towards 3.14 thanks to some intervention by the central bank (BCRA). In April, in order to offset a move higher in the currency pair, net central bank USD/ARS sales were $840mn. This compares to net central bank USD/ARS sales of $840mn in August 2007 meant to
offset risk aversion amid the credit crisis. In the interim months, BCRA was actually participating in net central bank USD/ARS purchases in order to prevent a substantial appreciation of the ARS and a loss of export competitiveness. These intervention amounts represent a small portion of Argentina’s total international reserves of $49bn. International reserves now represent over 8 months of import coverage. In fact, even if BCRA more actively stepped up the pace of intervention, the central bank could spend roughly $15 billion and keep reserves above 6 months of coverage.

Farmers have recently agreed to suspend a national strike and sit down to negotiate export taxes with the government. It is likely that the government will concede to a modest scaling back of agricultural export taxes, but this is unlikely to place a significant dent on public finances. Despite a disruption of some agricultural exports during the strikes, export tax receipts are still up 110% yoy in the Jan-Apr
2008 period thanks in large part to an increase in both agricultural prices and tax rates over the last year. Export taxes only represent 12% of total government tax receipts. Strong economic growth has led to an increase in other tax categories such as the VAT (41% yoy) and the corporate profits tax (33% yoy). Thus, changes in the export tax regime are unlikely to significantly affect total tax intake.
The current account should remain in surplus in excess of 2.5% of GDP as high commodity prices continue to boost the trade surplus. The trade accounts have remained in the black since 2002. However, outflows of capital started in the 2H of 2007. Part of the capital outflows reflected international stress in the wake of the US financial crisis. However, weaker fundamentals also likely contributed to outflows of capital coincident with questions surrounding the integrity of inflation statistics. Private sector nonfinancial capital registered an outflow of $2.6 billion and $1.7 billion in 3Q and 4Q, respectively. In contrast, the non-financial private sector experienced capital inflows of
$1.5 billion and $4.4 billion in 1Q and 2Q, respectively.

From the perspective of risk to the currency, the capital account situation has likely continued to demonstrate further outflows into early 2008. Nonetheless, the current account surplus will likely cover those demands for foreign exchange in the near term. Likewise, the challenge for the authorities has existed for some time without a sharp and sustained move higher in the peso.

Despite the cover from large trade surpluses, the fundamental situation in Argentina has deteriorated. For example, investors clearly remain concerned, as is evident in the pricing of a variety of Argentine assets. Although credit default swap (CDS) spreads have generally exhibited significant compression over the last few weeks, Argentinean CDS has not participated in this tightening move. The cost of insuring Argentinean sovereign debt against default remains among the highest in the Latin American region.

Net-net the macro policy mix is troubling especially with potentially under reported inflation. However, commodity driven growth will likely postpone any substantial move higher in USD/ARS.