Argentina
The battle for the dollar has begun
Por Guillermo Laborda
The battle for the dollar has begun. Less than a month before Election Day some major investors have begun to turn around their bets on the Argentine Peso. Guardar

This week, the Central Bank of Argentina started to return the dollars they had bought during the past forty-five days. The sweet days are over. Unlike what happens with international reserves, the Central Bank does not provide daily information on stocks or the amount of investment. Less than thirty days from the primaries, some major investors have begun to turn around their bets on the Argentine Peso. Such a low exchange rate has made the speculators happy with their bets and made them turn around.

Can the Bank manage the long and winding road until October 27th? Everything points to yes. This was the main topic last week at the Stock Exchange, during its 165th anniversary, where Macri was invited. Argentina's most prominent businesspeople and were also present. From Eduardo Eurnekian to Eduardo Elsztain, but also Javier Bolzico (ADEBA), Cristiano Ratazzi, Javier Ortiz Batalla (Banco Ciudad), among others.

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The IMF has learned that the dollar is revered in Argentina, and to lower inflation, the exchange rate must remain stable.

Intervening in the currency market before the election has to be done carefully. If the dollar goes up, the rise must be minimal so that it does not take over the headlines. The silence is healthy in this instance. The IMF has learned that the dollar is revered in Argentina, and to lower inflation, the exchange rate must remain stable. The tiny drop in March and April could have been avoided if David Lipton had understood it from the start, in February. This is the reason why the Central Bank was enabled to sell up to 3.6 billion in dollar futures.

The official bet now is that the result of the primaries is positive for the government, and so, the dollar does not heat up from August 12th to October 27th. The bets are configured like this: 1) If the Fernández ticket gets over 5 points in the primaries, market turbulence ensues; 2) If the difference is between 1 and 5 points, there will be little difference to how markets currently are; 3) If the difference is 1 point or less, or if Macri-Pichetto are ahead, there will be a strong rise in shares and bonds, and the dollar will remain calm or in a slight decline.

It is worth mentioning that the famous "carry trade", the bets on the Argentine Peso, were mostly done in New York, selling dollar futures, the Non-Deliverable Forward, and also at the ROFEX. And the counterpart of this dollar futures sale was always the Central Bank. Few people sold dollars and placed it in pesos with the LECAP. That is why the Bank is so calm in returning those bonds. At some point, the balance in a determined dollar level will return, and it will not be necessary for the Bank to sell.

The anxieties of Evo Morales

Last week's Mercosur Presidents' summit at Santa Fe was important. From all the attending Heads of State, the only one who was worried was Evo Morales. Each day, his gas exports are less desired in Brazil and Argentina. The reasons why Néstor Kirchner's administration signed a deal for a gas purchase from Bolivia for twenty years at a high price should be looked into. Knowing back then that the Vaca Muerta oil reserves were an opportunity, the span of such a deal is noteworthy. Nowadays, Argentina is buying from Bolivia at 1.2 million dollars something that can be easily replaced by Vaca Muerta.

This Monday, the details from the pre-document for the construction of the pipeline going from Vaca Muerta to Buenos Aires Province will be known. By the winter of 2021, this will put an end to the purchase of 300 million dollars of gas from Bolivia. Now, what will happen to the deal signed with Evo which expires in 2026? A matter that will have to be resolved by the next Argentine president. The man from Bolivia cannot tighten the rope either, because Argentina can directly cancel the entire purchase once it expires. The solution for Evo is to export to Chile, but the diplomatic problems between both countries make it unlikely.

The energy situation for Argentina is now in the take-off zone after the elections. In the subject of gas, there are only the subsidies given at Patagonia, and the imports of Liquid Gas during winter. In electricity, 80% of the dirty work has already been done. If Macri wins, the adjustment will not be necessarily done all of a sudden. Vaca Muerta is seen as allmighty. In Secretary of Energy Gustavo Lopetegui's team, the new pipeline construction is considered for being awarded the week before the Presidential election. Also, in the case of a Macri victory, the advancement of the sale of two stations and, eventually, the State's shares in Transener.

But in the short term, the polls rule. The fiscal and monetary situation is under control. July's revenue will for the first time show that the rise in income is tied with inflation. Mauricio Macri already sees himself as the winner, and he is ordering Ministers and officials plans for 2020. His ally Governor María Eugenia Vidal is eight points below in Provincia de Buenos Aires, but the distance is being cut shorter by the week.

Pressure on Powell

The traditional report by "the bear", the private banking executive who is hidden behind this pseudonym, was this time XL, covering every aspect. The main points were:

1) On July 1st, the US economic expansion began its eleventh consecutive year (that is, 121 months), making it the longest in history based on government records kept since 1854. Taking into account the last job figures, inflation, retail sales, current rate level, and observing the levels in which the American Stock Exchange is, there are no reasons to lower the rate at the end of the month.

2) However, there is a move started at the White House followed by a number of Wall Street players, some of them asking for 50 basis points, like the ones in Morgan Stanley and Bob Michele (CEO of JPMorgan Asset Management), saying that the 10 year rate will go to 0% because of the tariff war, the low inflation and the domino effect caused by the 15 trillion dollars already paying negative rates.

3) I believe that the market is betting on a 25 point cut at the end of the month, and if this does not happen, we will likely have a big "sell-off" which will eventually press Powell so that he agrees to Trump's demands. The late 2018 correction took him to change his words. Remember that 2020 is an Election Year, and if the drop remains at 50 basic points, then the party will go on for a while.

4) We have seen how a bad balance wrought havoc on Netflix, who closed 10% below. In spite of that, many analysts are anticipating a 35% rise this year.

5) In Argentina, shares (in dollars) faced the resistance of February and were not able to break into it. The bonds were stabilized at a risk close to 800 points and an exchange rate intervened by the Central Bank, selling dollar futures at least until August 12th, the day of the presidential primary, and with Leliq rates at 59%. For those who have cash and assume the Argentine risk, taking into account that there is no rent outside, they will have to buy the new TECOAR 8% to 2026 bond, released last week.

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