The decline in interest rates makes the carry trade increasingly more demanding, a strategy in which investors sell dollars to position themselves in instruments in pesos with the expectation that interest rates will advance more than the exchange rate and, in this way, at a certain point repurchase more currencies with the profit. Although exchange rate calm is expected in the coming months, the fall in yields in pesos makes the maneuver need greater stability in the exchange rate to ensure profits in dollars.
The yields compressed in recent weeks and they are already found between 1.6% and 2% monthly in the fixed rate instruments offered by the Treasury, such as Lecap and Boncap. Assets in pesos operate like this with negative interest rates in real terms: well below inflation, which in March rose by 3.4% monthly in the general index and, although a slowdown is expected from April, the advance of the prices of the economy would continue above the yields in pesos.
In any case, the most important thing in the carry trade strategy is the evolution of interest rates compared to the performance of the exchange rate: the price of the dollar needs to advance less than the yields in pesos or, better yet, to fall during the period in which the maneuver is applied. After the exchange rate stability and bearish trend In recent weeks, no one can guarantee that there will not be a rebound of more than 2% in the price of the dollar, which would quickly erase the expected gain and even generate losses.
Above all, taking into account the distance from the ceiling of the floating band, which is increasingly wider: the official wholesale exchange rate operates about 23% below the maximum allowed by the Central Bank. This implies that the price of the dollar has a very wide margin to advance without the monetary authority slowing it down through reserve sales, as established by the exchange rate scheme. Therefore, the carry trade contains greater risk and is accentuated by the low returns offered by financial assets in local currency.
Despite the greater theoretical risk in the strategy, the consensus of market analysts indicates that exchange stability, even with a bias toward peso appreciation, will extend at least until mid-year: the large agricultural harvest would keep the supply above the demand for dollars and, at the same time, the BCRA would continue buying strong amounts of reserves in the exchange market (it already exceeds US$6,000 million so far this year).
How much is needed to cover the carry trade against the top of the dollar band
Salvador Vitelli, research leader at Romano Group, warns that since a year ago, when the exchange rate band scheme started after the relaxation of the stocks, so many months of carry trade were never needed to cover the difference between the official wholesale exchange rate and the band ceiling: now, it is needed eleven months of interest rates so as not to lose against the dollar, in a hypothetical scenario that the price rebounds to the limit established by the Central Bank.
According to the calculation, something similar happened in April of last year, after the release of exchange controls for individuals: at that time, it took just over ten months to cover the difference between the exchange rate and the ceiling of the exchange band. The “best moments” for strategy They were in September and October of last year, when the price of the dollar touched the ceiling of the band, driven by financial tensions due to pre-election uncertainty.
This is a hypothetical exercise, based on the official price of the dollar in the wholesale market rising until it reaches the ceiling of the floating band, which for now seems unlikely due to the large supply of foreign currency that the dollar provides and will continue to provide. agro-export sector until the middle of the yearwithin the framework of the liquidations of the coarse harvest, which should extend the exchange rate calm. But we cannot rule out the eventual appearance of a local event or forceful external shock that will cause the price of the dollar to rebound and cancel out the expected gain from the carry trade and even cause losses.
Less attractiveness in the carry trade and caution in the market
The consulting firm Outlier states that “the carry trade no longer looks so attractive” for any investment profile (not even for risky ones) due to the combination of low interest rates and low official exchange rate, increasingly further away from the ceiling of the floating band. Therefore, suggests its clients close positions in domestic currency and gradually dollarize the portfolio through:
- Shares in the US market (Cedear)
- Argentine debt securities in dollars of the long section of the maturity curve
For those who must remain in pesos, the consultant suggests CER bondswhich follow the evolution of inflation, in medium-term positions, such as TX26 or TZXO6, since the “breakeven rates” still favor these instruments despite negative real returns. To manage liquidity in domestic currency, it proposes positioning itself in money market or Lecap maturing no more than June.
What other analysts say about the future of the carry trade
Juan José Vázquez, research leader at Cohen Aliados Financieros, also suggests take profits from positions in pesos gradually. In any case, he affirms, there will be a thermometer: the purchases of reserves by the Central Bank. He estimates that as long as the buying streak continues, it is likely that the carry trade will remain in force because the yields in pesos would exceed the advance of the official exchange rate. Still, consider that “the risk does not justify it”.
“We come from very high yields in dollars with bonds in pesos (both CER and fixed rate), but current levels no longer justify purchase recommendations in instruments in domestic currency. In a context of low price for the dollar, which could imply the most depressed real exchange rate of the second half of Javier Milei’s government, we see it wise to rotate from instruments in pesos towards sovereign debt securities in dollars,” adds Martín Genero, analyst at Clave Bursátil.
