What can happen to the dollar in the rest of the year?

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Given its critical influence on the national economy, it is necessary to analyze what happened in the exchange market in recent months and the prospects. The month of May was one of the best in the balance of foreign exchange operations since 2003. In 2021, net purchases accumulated 5.73 billion dollars and reserves were recovered, strongly reducing a gap that had reached very high levels in October. According to BCRA estimates, a current account surplus would have been reached. This was achieved by a series of factors, a good harvest, excellent international commodity prices, and the strengthening of exchange regulations.

The BCRA had no need to intervene in implicit markets in April and May and was able to reduce its open position in exchange futures. Thus, the Government was able to regain control of exchange rate policy and generate a favorable expectation of refinancing maturities with the Paris Club and the IMF, favoring exchange and financial stability. Monetary and fiscal policies that moderated their necessary ultra-expansionary bias in the first phase of the pandemic also contributed to improving the financial climate. Given all the above, analysts who predicted a strong devaluation in 2021, have had to run their forecasts for the future.

Let us remember that the exchange rate is competitive and is at levels similar to the 60 pesos per dollar in August 2019, which is equivalent on average to the exchange rate from 2003 to 2011. The values ​​of the MEP dollar or the Cash with Settlement in October were at values ​​comparable to the hyperinflationary peaks of 1982, 1989, and 1991.

Beyond the above, the role of the exchange rate in a monetary economy like Argentina should never be underestimated. The next few months will be less comfortable in the supply of foreign exchange and we will face five challenges in exchange matters.

1) Elections: We entered the electoral campaign. All odd-numbered years have generated a higher demand for exchange coverage in the second half.

2) Pandemic: We will live with a strong global uncertainty derived from the health situation, with high volatility and risks of lower growth, in addition to the fact that increased vaccination should stabilize the world and local economies in the coming months. But the health issue is the greatest global risk to face since it would entail the need for greater financing to individuals and companies in the event of possible restrictions on circulation.

3) United States rates: Another risk factor is a rise in rates in the US, the weakness of the dollar worldwide favors the price of commodities and our competitiveness. The signals that the Federal Reserve has given is that there is a long time left where monetary policy will prioritize job creation, which has been recovering but at a slower pace and that beyond a rise in inflation, it is not required in 2021 of a change in monetary policy in the United States.

4) Inflation: Lowering inflation is key to containing devaluation expectations that can amplify future inflation, avoiding a greater gap that weakens the exchange rate anchor and anti-inflationary policy. Containing inflation will be a challenge that should be compatible with recalibrating in a more expansive way the bias of monetary and fiscal policies in view of the need to recover employment and real wages.

5) Growth: Maintain external balance with a growing economy that always generates in our country a greater increase in imports than exports. The anti-inflationary policy must be reconciled with the need to export, a tension that is starkly reflected in the meat problem.

In a new normal, it will be necessary to deepen a development policy that allows softening the cyclical external shocks. In summary, the most probable scenarios (ruling out highly disruptive global health-economic scenarios) give the Government scope so that with the resources and policy instruments available, we can go through a complex but manageable second semester.

Reserve growth

The evolution of international reserves this year is auspicious data for an economy that, although historically it has suffered from the problem of external restriction, has seen the problem worsen over the past year, as a result of the context of local and international uncertainty caused the pandemic.

The monetary authority of the country has accumulated reserves in the first five months of the year, according to data from the entity itself, for approximately 2,500 million dollars, amounting to what was purchased by the Central Bank itself to 5,730 million dollars. This accumulation was attenuated by payments to International Organizations and decreases in deposits, which exceeded 2,000 million dollars.

If we compare this performance with previous years, the figures are eloquent: in 2019 and 2020 our country saw its international reserves fall by 21,000 and 5,500 million dollars, respectively. This shows the harmful effects that the financial and exchange deregulation of macrismo had for our country in the first case and the effects of the pandemic in the second. As regards the purchase of foreign currency, in those years the monetary authority sold much more foreign currency than it bought.

If we look back to understand the magnitude of the good exchange rate present, it is observed that the currencies acquired in the course of the year by the entity represent the same figure that was bought in all of 2014.

The exchange rate gap is the other important factor to analyze by virtue of its impact on devaluation expectations. After the peak reached in October last year, in which the gaps of the blue dollar and MEP with respect to the official wholesale dollar reached 120 percent and 100 percent respectively, they saw their levels fall steadily until they reached the end of April 60 and 63 percent respectively.

However, during May they have recovered slightly an upward pattern, rising approximately six points each, reaching the blue gap by 66 percent and the MEP dollar by 70 percent.

Although these margins place them at levels similar to those of February, they should not be interpreted as a sign of weakness in the external sector. The rate of currency settlement is positive, since, for the last week of May, for example, it is at positive levels and above the daily average for 2021.

The trajectory of the gaps in the remainder of the year will depend on a number of factors, one of them being the evolution of uncertainty. The higher rate of arrival of vaccines, the acceleration in vaccination levels, and its consequent positive impact on economic activity will contribute positively.

On the external front, the improvement in the terms of trade will make it possible to sustain the inflow of foreign exchange and face the greater foreign exchange needs that Argentina usually has in the second half of the year. During 2020, for example, the reduction in the level of reserves that occurred between the months of July and December amounted to 3,854 million dollars.

In the most pessimistic scenario, which could mean such a trajectory for the second semester, and assuming that in June the BCRA will accumulate reserves for a figure similar to that of May, the increase in reserves in 2021 will be around 250 million dollars. The figure looks very positive when compared with the fall in reserves suffered in the last two years by 26,000 million (21,000 million in the last year of the Macrista government). Whether or not this estimate is met will depend on the agreement reached with the Paris Club and the International Monetary Fund.

It does not seem unrealistic to assume that the economic reality will end up showing a better result than last year due to some factors that may give the government greater degrees of freedom in its economic policy. In this sense, it is worth remembering that the first four months of this year were very positive in terms of collection and that its evolution has largely exceeded the evolution of inflation. The challenge will be to unite efforts so that wages beat inflation in a year in which the pandemic once again demands an effort from all sectors to achieve economic and social objectives.