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The lowering of the interest rate of the Central Bank, which occurred in mid-May, ended up marking a before and after in the mood of the markets. The cut was more abrupt than expected, a decision that ended up disassembling expectations of investors, who lost the incentive to stay in pesos. Since then, free dollars have been trading higher and financial assets have turned red, a trend that has deepened in recent weeks following the increase in political noise in Congress.
“Today, in retrospect, the excessive lowering of rates was a mistake,” said Fernando Camusso, director of Rafaela Capital. A month ago, with the objective of cleaning up the Central Bank’s balance sheet, the monetary policy interest rate was cut to 40% nominal annual rate (TNA). Consequently, the banks adjusted the performance of the Fixed deadlines downwards, at 30% annually (2.5% monthly). This also affected mutual funds. money market, that today offer a similar rate, and forced investors to rearrange their portfolio towards other instruments that pay more.
“Since the Minister of Economy, Luis Caputo, took office, he prioritized cleaning up the Central Bank’s balance sheet. For that, he needed a lower interest rate, which is what he did in recent months. Why did it work? Because with the exchange rate and gap controlled, the market was betting on the carry trade. That is, the rate in dollars that is achieved by accruing the rate in pesos with an ironed dollar. At the same time, with strong fiscal adjustment, there was a double fiscal-monetary anchor. But everything has a limit: in this case, the rate is lowered too much or cut too quickly, which is what happened. The monetary anchor of the economic program was lost, the carry trade It was closed and there was strong dollarization”Camusso added.
For Salvador Vitelli, head of research from Romano Group, The “rush” of lowering interest rates was the kick-off of the turbulence that the market is still going through today. However, a succession of political events were also added to this scenario that ended up defining the volatility of dollars and financial assets. First, he mentioned the lack of agreements to ensure the final approval of the Bases law, which underwent several modifications with respect to its original wording. Second, the half sanction in Deputies of a new retirement formula, with a recomposition in income equivalent to 0.45% of GDP.
Thus, since mid-May, Both the blue and the financial dollars accumulated an advance of 22% and found a new floor around $1,300. The country risk rose 246 basis points (19.7%), reaching the highest value in the last three months, after sovereign debt bonds accumulated falls of up to 13%.
“The inflection point? Ex post We could identify it on May 14, the day the BCRA decided to prune the repo rate from 50% to 40% TNA and further encourage the migration of banks towards Lecap (Treasury Bills Capitalizable in Pesos). In any case, several factors would have influenced the change in market mood, such as the increasing difficulty in approving reforms in Congress, and red flags in some sensitive macroeconomic variables,” agreed Nery Persichini, economist at GMA Capital.
For Camusso, the Government now faces the challenge of recalibrating market expectations, a task that he considered is not as easy as raising the interest rate again to the levels it was at a month ago. “Whoever dollarized does not quickly decide to turn around. It is a market that went to the dollar and took profits. Now exogenous factors, which were not strong before, are beginning to weigh”, he noted.
What happens with the Base Law this week in the Senate, the liquidations of agricultural exporters, the negotiations with the International Monetary Fund (IMF) and the debt maturity payments could set the mood of the market in the coming weeks.
“Investors are dollarized, now they expect many more things than in previous months,” he said. For the director of Rafaela Capital, the Central Bank could “speak to the market” by offering a minimum rate in the next Lecaps tenders.
“Argentine assets went through a rally very strong bullish trend from last year’s runoff until now, so in recent days there has been a very strong correction. For this reason, now the market is beginning to demand a little more sustainability in the Government’s plan, marking the necessary political agreements to cement this macro consolidation. And, at the same time, that the adjustment of the fiscal surplus is sustainable over time. Although the Government is on the right path, it showed a good signal for investors on commercial and fiscal issues, They need to make certain guidelines known about where we are going. Meanwhile, in the short term the political issue will be crucial,” Vitelli added.
Persichini pointed out in the same sense, who highlighted that the market today shows signs of “exhaustion, anxiety and restlessness.” For this reason, it requires a greaterdelivery” in regards to the structural reforms that have to be made, as well as certainty about the exit of the exchange rate.
“In our opinion, the second cannot be executed without the first and, since the path no longer depends so much on Javier Milei, but on Congress, Investors become cautious, recalibrate their initial ‘optimism’ and seek coverage. Before there seemed to be no scenario in which things went wrong. Now yes,” she completed.
A key sign will happen this Thursday. Indec will release inflation for May, a figure that Caputo expects to be below 5% monthly. In parallel, the board of directors of the Central Bank (BCRA) will meet, who could decide to lower the interest rate even further (as they did in recent months) or leave it unchanged at 40% TNA.
