Wednesday, September 3, 2014

Another dollar bullish fundamental

By Daniel Cancel

Argentine President Cristina Fernandez de Kirchner’s efforts to fortify the economy against the fallout from the country’s default are being undermined by a surge in demand for dollars.

Individuals bought $42 million yesterday, the most for a single day, after a monthly record of $260 million in August following the country’s July 30 debt default. Dollar sales by the government have drained $1.4 billion from international reserves this year, or about 5 percent of remaining funds used to pay foreign creditors and import goods.

Argentines are dumping pesos to buy dollars, shares or durable goods to shield their savings from inflation of 38 percent and a collapse in the currency. Since the default, the peso has fallen to record lows in unofficial markets. Fernandez, who imposed limits on dollar purchases and other capital controls after being re-elected in 2011, devalued the peso in January by the most since 2002 and has restricted imports in a bid to save hard currency.

“We’re seeing a growing gap between returns you get in pesos compared with dollars, and people are buying what they can on devaluation expectations,” said Luciano Cohan, the head economist at research organization Elypsis in Buenos Aires. He predicts dollar purchases will climb to as much as $400 million in the remaining months of this year.

The peso has lost 22 percent to 8.41 per dollar this year, the world’s third-worst performing currency. In the black market, the currency has weakened 30 percent to 14.25 pesos -- another indicator of how precious the greenbacks have become to Argentines.

Official Purchases

Under a system put in place in January, Argentines are allowed to make monthly dollar purchases at the official rate of as much as 20 percent of their salary, up to a maximum of $2,000.

According to tax agency figures, most people who buy dollars via the official channels opt to pay a 20 percent surcharge to hold bills instead of depositing the funds in an Argentine bank. That means they’re paying an effective rate of about 10 pesos for each dollar, still less than the black market rate.

A central bank press official declined to comment on the dollar sales.

Argentina defaulted on its foreign bonds after a $539 million interest payment was blocked by a U.S. judge, who said the country must first compensate holders of debt from the nation’s 2001 default that successfully sued for full repayment. Fernandez has said paying the so-called holdout creditors, led by Paul Singer’s Elliott Management Corp., would expose Argentina to additional claims that it can’t afford from investors who agreed to bond swaps in 2005 and 2010 at about 30 cents on the dollar.

‘Domestic Adjustment’

Before the most recent default, Argentina had been moving closer to reaching agreements that would allow it to return to overseas capital markets for the first time since its $95 billion default in 2001. Since October 2013, the government had settled arbitration cases at the World Bank, compensated Repsol SA for the nationalization of its stake in YPF SA and agreed to pay the Paris Club of creditor nations $9.7 billion in overdue debt.

The government has lost maneuvering room since the U.S. court ruling, making it more likely the government will be compelled to devalue the peso, according to Barclays Plc.

“Since the path to regain market access has been closed, your only option is a domestic adjustment,” Sebastian Vargas, an economist at Barclays in New York said. “There is a higher risk that reserves come under pressure, because domestic adjustment is politically and socially costly.”

Bank Reserves

Argentine dollar bonds due in 2033 rose 0.33 cent to 80.89 cents on the dollar as of 8:43 a.m. in New York.

Central bank reserves have fallen by more than a fifth in the past year to $28.5 billion. A record soybean harvest has failed to rebuild foreign currency reserves, as commodity prices tumbled to a four-year low and more farmers held onto a portion of their grains to get a better exchange rate in the future.

Currency traders expect the official peso to weaken 12 percent over the next three months to 9.5 per dollar, based on the market for non-deliverable forward contracts, which are used to speculate on future moves in the exchange rate.

Even with the economy in recession, annual inflation has accelerated to 38 percent, the highest since the end of a one- to-one peg to the dollar in 2002, according to estimates by Elypsis.

The government, which overhauled its inflation index in January, said accumulated inflation was 15.6 percent through July and hasn’t published an annual figure yet.

“It’s not clear in what direction policies are headed,” Vargas said.

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