Forex
Argentina, in dollar love affair, agonizes over divorcing the peso
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© Reuters. FILE PHOTO: A one hundred Argentine peso bill sits on top of several one hundred U.S. dollar bills in this illustration picture taken October 17, 2022. REUTERS/Agustin Marcarian/Illustration/File Photo
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By Marc Jones, Eliana Raszewski and Rodrigo Campos
LONDON/BUENOS AIRES/NEW YORK (Reuters) – María Barro, a 65-year-old domestic worker in Buenos Aires, buys a few dollars each month with her peso salary, a hedge against Argentina’s persistent inflation now running at over 100% and a steady devaluation of the little-loved local peso.
The peso currency is now in the crosshairs of the country’s dark horse presidential front-runner, libertarian radical Javier Milei, who has pledged to eventually scrap the central bank and dollarize the economy, Latin America’s third largest.
Milei – facing a tight three-way battle with traditional political candidates on the right and left ahead of an Oct. 22 vote – says savers like Barro underscore why Argentina should shed the peso.
“I try to buy dollars, no matter how little,” said Barro, who started to buy greenbacks on parallel markets in 2022 when 2,000 pesos got her $10. Now it would get her $2.70. “Pesos go like water and every day they are worth less.”
Barro supports the idea of a dollarized economy in theory, but says she doesn’t like Milei’s aggressive style, which involves regular expletive-laced tirades against rivals and even the Pope. She is still undecided about her vote.
Milei’s dollarization plan has sharply divided opinion: his backers argue it is the solution to inflation near 115% while detractors say it an impractical idea that would sacrifice the country’s ability to set interest rates, control how much money is in circulation and serve as the lender of last resort.
“The argument for dollarization is that there is no price stability and the independence of the central bank is an illusion,” said Juan Napoli, a Senate candidate for Milei’s Liberty Advances party.
Napoli admitted Argentina was not yet ready for full dollarization. Milei and advisers have talked about a nine-month to two-year time frame.
“It requires a great political agreement between us and also having sufficient reserves,” Napoli said. The central bank’s current net foreign currency reserves are deep in negative territory. “It will take a while, it won’t happen immediately.”
‘ABSOLUTE LAST RESORT’
Dollarization has been tried elsewhere, usually either replacing the local currency with dollars at a set exchange rate, or intervening in the markets to ‘peg’ the local tender to the dollar. The central bank loses its monetary policy setting role, but often is kept to handle technical and administrative tasks such as reserves management and payment systems.
Argentina pegged its peso to the dollar in 1991 under the neo-liberal economic policies of President Carlos Menem and even debated full dollarization. However, it was forced to undo the peg a decade later as a major economic crisis and run on the peso sparked riots and saw the currency board collapse.
Bolivia has a dollar peg, Venezuela has a quasi-dollar driven economy, while Ecuador, El Salvador and Panama all officially use the dollar. Zimbabwe dollarized and then abandoned it, though economists estimate that 80% of its local economy remains in dollars.
Argentina’s $650 billion economy, though, would be by far the largest dollarization experiment, were it to happen. The country is a major global exporter of soy, corn and beef, has one of the world’s largest reserves of electric battery metal lithium and huge shale gas and oil reserves in Vaca Muerta.
Many Argentines themselves are unconvinced, fearing loss of economic independence and over-reliance on the United States. Polls in recent months show more people oppose the idea, though some new surveys suggest support is rising as inflation peaks.
“I don’t know what’s the solution, but I disagree with dollarization,” said Martina Rivero, 25, who works at a baby clothes store in Buenos Aires’ trendy Palermo district.
Milei’s presidential rivals, Economy Minister Sergio Massa and conservative ex-security minister Patricia Bullrich, have both shot down the idea of dollarization as impractical.
The government also has a $44 billion loan program with the International Monetary Fund (IMF), which means economic policy making often comes with strings attached. Milei spoke with the IMF in August, with dollarization part of the discussion.
While the IMF has not commented on the plan, many experts see it as a drastic move.
“To me, it is an absolute last resort,” said Olivier Blanchard, a former IMF chief economist and now an academic. “It’s very costly to give up flexibility of the exchange rate.”
DOLLARS UNDER THE MATTRESS
Mark Sobel, a veteran U.S. Treasury official now at the OMFIF policy think tank in the United States, said dollarization meant authorities would lose the ability to act as a lender of last resort, which would “heighten the vulnerability of the financial system.”
Instead, he said the central bank needed to stop printing money to fund the Treasury and cut its fiscal deficit.
For many, the issue is that Argentine savers’ love of the dollar is almost impossible to undo. Many were burnt when the government confiscated, froze or forcibly converted deposits in 1989 and 2002 in what is locally known as the “corralitos”. Trust has been hard to win back since.
A widely cited bit of official data suggests that Argentines have as much as $371 billion in dollar assets, much of it outside the local financial system, reflecting decades of people putting non-peso savings out of the government’s reach, weakening the domestic economy.
“Savings now get stuffed in the mattress or at best to invest in another country. So the link between savings and investment in Argentina is broken,” said Facundo Martinez Maino, an economist who worked on Bullrich’s economic plan.
That plan supports formalizing a “bi-monetary” system the country already has informally to bring those squirreled-away dollars back into the formal financial system.
“Dollarization is a huge fantasy and it is a big campaign lie,” said Martinez Maino. “Not even the most fanatical, fervent supporter of dollarization in Argentina can argue for it seriously right now. For a simple reason. Argentina has no reserves.”
In a recent public war of words, Milei said Bullrich’s plans were “cowardly, lukewarm, and would end in hyperinflation and bloody dollarization”.
Supporters of dollarization say it would boost the country’s risk premium – good news for long-suffering investors – and should be feasible by first converting just physical cash.
Argentina’s monetary base of cash in circulation and deposits is 6.15 trillion pesos, around $17.5 billion at the official exchange, central bank data show. At widely-used parallel exchange rates, however, that’s only $8.4 billion.
“It is already a principle that Argentines practice on a daily basis. They keep huge amounts of dollars in their houses,” said Riccardo Grassi at Mangart Advisors, a Switzerland-based hedge fund involved in Argentina’s huge 2020 debt restructuring.
“Dollarization is a rational idea,” said Grassi.
‘LACK OF CONFIDENCE IN THE PESO’
On the streets of downtown Buenos Aires, there are signs everywhere with dollar prices alongside those in pesos. Some things – houses or cars – are closely linked to the dollar already and expensive, while other prices are held artificially low by subsidies, including utilities, fuel pump prices and public transport.
Some local firms already opt to pay salaries, at least in part, in dollars. Some 20% of local bank deposits are dollarized, although that doesn’t catch greenbacks stashed outside the banking system.
Claudio Loser, a former IMF director for the Western Hemisphere, said dollarizing fully, though, would be a “terrible shock” to the economy as holders of pesos would exchange them at a very high rate, diluting savings. Wealthier people with stashed dollars would have more protection.
Back on the streets of Buenos Aires, 18-year-old student Nicolas Ventrice was in favor of dollarization and Milei, though he admitted he didn’t really understand what it involved.
“What motivates young people the most is the dollarization of the country,” he said. “(Milei) explains it more or less, though I never fully understand how he is going to do it… all that stuff is a bit confusing.”
Forex
Major Russian lenders say yuan coffers empty, urge central bank action
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By Elena Fabrichnaya
MOSCOW (Reuters) – Major Russian banks have called on the central bank to take action to counter a yuan liquidity deficit, which has led to the rouble tumbling to its lowest level since April against the Chinese currency and driven yuan swap rates into triple digits.
The rouble fell by almost 5% against the yuan on Sept. 4 on the Moscow Stock Exchange (MOEX) after the finance ministry’s plans for forex interventions implied that the central bank’s daily yuan sales would plunge in the coming month to the equivalent of $200 million.
The central bank had been selling $7.3 billion worth of yuan per day during the past month. The plunge coincided with oil giant Rosneft’s 15 billion yuan bond placement, which also sapped liquidity from the market.
“We cannot lend in yuan because we have nothing to cover our foreign currency positions with,” said Sberbank CEO German Gref, stressing that the central bank needed to participate more actively in the market.
The yuan has become the most traded foreign currency on MOEX after Western sanctions halted exchange trade in dollars and euros, with many banks developing yuan-denominated products for their clients.
Yuan liquidity is mainly provided by the central bank through daily sales and one-day yuan swaps, as well as through currency sales by exporting companies.
Chinese banks in Russia, meanwhile, are avoiding currency trading for fear of secondary Western sanctions.
At the start of September, banks raised a record 35 billion yuan from the central bank through its one-day swaps.
“I think the central bank can do something. They hopefully understand the need to increase the liquidity offer through swaps,” said Andrei Kostin, CEO of second-largest lender VTB, stressing that exporters should sell more yuan as well.
The acute yuan shortage also follows months of delays in payments for trade with Russia by Chinese banks, which have grown wary of dealing with Russia after U.S. threats of secondary Western sanctions. These problems culminated in August in billions of yuan being stuck in limbo.
Russia and China have been discussing a joint system for bilateral payments, but no breakthrough is in sight. VTB’s Kostin said that since Russia’s trade with China was balanced, establishing a clearing mechanism for payments in national currencies should not be a problem.
Forex
Bank of America sees more downside for the dollar
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Investing,com – The US dollar has stabilized after a sharp fall in August, but Bank of America Securities sees more troubles ahead for the US currency.
At 07:20 ET (11:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 101.077, having largely held its course over the last week.
That said, the US currency is still down 1.6% over the month.
The dollar’s selloff last month stood out in a historical context, according to analysts at Bank of America Securities, in a note dated Sept. 5.
The greenback has since stabilized, however, despite the outsized weakness, the US bank still sees three reasons to stay bearish on the Dollar Index (DXY).
Following similar episodes of bearish DXY breakouts, the index has tended to continue its downtrend, the bank said.
In the last 3 analogs, DXY index fell on average for another 4% before reaching a bottom. Extending this analysis to bilateral USD/G10 pairs suggests a continuation of the USD downtrend is more likely vs EUR, GBP, and AUD than SEK, NOK, and CHF in G10.
While the DXY made a new year-to-date low in August, broad nominal and real USD trade-weighted indices have stayed at Q4 2022 levels and would suggest the USD remains overvalued.
The USD selloff in 2024 has been concentrated in and other European currencies, leading to DXY divergence from other USD indices.
The bank also noted US 10y Treasury yield’s tendency to fall after the first Federal Reserve cut, while global financial conditions are set to loosen further.
“USD may see more weakness as other central banks, particularly the ones that cut policy rates ahead of the Fed, can now afford to let the Fed do some of their work and indirectly support global economies outside of the US,” BoA added.
Forex
Dollar’s demise appears overstated – JPMorgan
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Investing.com – The US dollar has had a difficult summer, dropping substantially during the month of August, but JPMorgan thinks those predicting the demise of the U.S. currency are getting ahead of themselves.
At 06:00 ET (10:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 101.127, having lost 1.6% over the course of the last month.
“Diversification away from the dollar is a growing trend,” said analysts at JPMorgan, in a note dated Sept. 4, “but we find that the factors that support dollar dominance remain well-entrenched and structural in nature.”
The dollar’s role in global finance and its economic and financial stability implications are supported by deep and liquid capital markets, rule of law and predictable legal systems, commitment to a free-floating regime, and smooth functioning of the financial system for USD liquidity and institutional transparency, the bank added.
Additionally, the genuine confidence of the private sector in the dollar as a store of value seems uncontested, and the dollar remains the most widely used currency across a variety of metrics.
That said, “we are witnessing greater diversification and important shifts in cross-border transactions as a result of sanctions against Russia, China’s efforts to bolster usage of the RMB, and geoeconomic fragmentation,” JPMorgan said.
The more important and underappreciated risk, the bank added, is the increased focus on payments autonomy and the desire to develop alternative financial systems and payments mechanisms that do not rely on the US dollar.
“De-dollarization risks appear exaggerated, but cross-border flows are dramatically transforming within trading blocs and commodity markets, along with a rise in alternative financial architecture for global payments,” JPMorgan said.
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