Oxymoron or Regimen Change?
In mid-October, we published our latest report with a provocative title: “Carry Forever” and a subtitle posing the eternal question: Is it different this time? A month and a half later, the exchange rate gap dropped from 20% to 7%, the country risk index continued its decline from 1,100 to 769 basis points, the interest rate on Lecaps fell from 3.9% monthly to 2.9% and 2.6% for the shortest and longest terms respectively, and the monetary policy rate decreased again to 2.7% monthly. Meanwhile, inflation stood at 2.7% in October, and November is estimated at 2.9%, according to our Retail Price Survey.
The official announcement indicates that if inflation continues to decline—through measures such as eliminating the PAIS tax, a segmented reduction in tariffs, and incentives to purchase imported goods via foreign platforms by increasing tax-free thresholds and reducing taxes—the Central Bank (BCRA) would slow the pace of the dollar’s monthly crawl to 1%. This move aims to further ease inflationary pressures. Recall that the budget, submitted to Congress in mid-September, projected an average crawl rate of 1.4% per month for 2025 (18.4% annually, consistent with an exchange rate of $1,207 in December 2025 and cumulative inflation of 18.4%). The initial, unwritten message suggested a gradual reduction to 1%. Now, the message is that the crawl will drop to 1% per month as soon as nominal indicators allow, hinting at early 2025, which has triggered a steep decline in the futures curve. The positive real interest rate -compared to the crawl rate and falling financial dollar prices, thanks to interventions- continues to support the carry trade. This effect is amplified by seasonal demand for money this month. Through the Blend mechanism, $1.524 billion flowed into the system in October ($14.5 billion since its inception), alongside an additional $200 million in interventions ($970 million since June, when the withdrawal of pesos issued to purchase dollars was announced).
The inflection point for this rally came in early October, when the BCRA resumed dollar purchases after four months of neutral or slightly negative interventions. These purchases coincided with import payments and the continued Blend mechanism. Fiscal equilibrium commitments and the minimal impact of fiscal adjustments on public opinion also contributed to extending the rally. Ultimately, as we’ve argued since the start of this administration, the market focuses on four factors: 1) fiscal consolidation, 2) the pace and composition of disinflation, 3) BCRA’s dollar purchases, and 4) polling data amid a polarized environment where the political “center” has dissolved, leaving two extremes—one led by Cristina Kirchner—vying for prominence.
In retrospect, the controversial decision to use reserves to intervene in the exchange rate gap in July served as a bridge to a capital amnesty far larger than anticipated by either the market or us. Approximately USD21 billion entered the system, with USD14 billion still held in deposits, USD6.5 billion of which remain in bank branches. Conversely, dollar-denominated credit rose by USD2.7 billion, and nearly USD5.425 billion in corporate bonds were issued. Part of these funds have been used by the BCRA for dollar purchases since October, in a context where the foreign exchange current account (with Blend) has widened the deficit. With imports reaching USD6 billion in October, and additional boosts from credit and the exchange rate lag, the accrued current account will also shift into deficit by 2025—a projected 0.7% of GDP deficit compared to the 0.3% surplus expected for 2024?
The downside of this framework is a multilateral real exchange rate that this week returned to levels seen before last December’s correction. While bilateral exchange rate with the U.S. have not yet been eroded by inflation’s initial leap, the sudden global dollar strength following the U.S. elections (Dollar Index at 106) and, more critically, the Brazilian Real’s depreciation (exceeding R$6 per dollar) has accelerated the Peso’s appreciation. Looking at the broader picture, the multilateral dollar exchange rate of $1,015 is below the minimum of the Macri administration and nearing the end-of-Convertibility levels (though at that time, export taxes did not exist). Argentina has become expensive in dollar terms, and the systemic productivity gains being pursued through deregulation are insufficient to offset this trend. Financial normalization is beginning to impact decision-making for households and businesses as they adapt to an aggressive regime shift that continues to unfold.
For now, financial normalization is contributing to disinflation and a rebound in economic activity, which in turn supports favorable polling results that reinforce the financial recovery. Looking ahead to 2025, fiscal policy is expected to remain neutral (continuing the adjustment without deepening it). Monetary and credit policies have become highly expansive since April, with domestic interest rates decoupled from external markets thanks to capital controls. Income policies are also becoming marginally positive, particularly for formal private sector employees in protected industries, but also for informal sector workers, whose incomes are beginning to recover. The most affected groups remain those reliant on state incomes, such as public sector salaries and transfers, with the exception of the Universal Child Allowance (AUH), whose amount was doubled. Meanwhile, there is a deterioration in employment quality, with formal jobs decreasing and informal and self-employed (monotributista) roles increasing.
If the exchange rate gap fully compresses, the Blend mechanism will effectively (or formally) disappear, leaving the key question of how many dollars the BCRA will need to use to keep the gap compressed. The rebalancing between markets will likely form part of the unwinding of capital controls, though a full liberalization—especially of existing stock—seems highly unlikely, particularly in an election year. This will remain the case unless a robust financial strategy with the IMF and markets is well underway. Will this involve new debt, debt swaps, or repos? That remains to be seen.
