Peso rates are finally starting to beat inflation and the dollar: what could happen to the financial cycle?

Following the lifting of the currency controls and the sustained decline in the monthly inflation rate, peso-denominated bonds became the star option in the local market. Bonds in Argentine currency achieved two milestones: their rates outperformed the monthly devaluation and also outperformed rising domestic prices.

Given this scenario, the big winners are the so-called "carry traders," who sell their dollarized positions to profit from dollar rates. However, the City warns that this strategy could lose its luster in the coming months, when the supply of dollars from soybeans dwindles and the approaching elections bring additional volatility to the foreign exchange market.

In the first three weeks of June, the official dollar fell 2.3% , adding to the 3% drop it recorded last month. Thus, since the end of foreign exchange restrictions was announced, the retail exchange rate has only risen 7% .

The city believes that, beyond the slight upward pressure the dollar experienced on the last business day of the week, this trend could deepen in the final stretch of the month, when the government's agricultural tax exemption period expires.

At the same time, interest rates in pesos became real against rising prices. "While in December 2023, fixed-term deposits lost 79% in real and annualized terms , last month deposits managed to exceed double-digit positive rates after adjusting for inflation," said Nery Persichini of GMA Capital, adding: "This is a rare phenomenon in our market. Since 2002 , 69% of the time, fixed-term deposits have lost against prices, with an average annual return of -4.2%. Those who opted to save in pesos have lost significantly against inflation."

Now, the market is preparing for some changes that will begin to take effect at the start of the second half of the year. The most worrying is the announced end of the Lef i (Fiscal Liquidity Notes), the instrument created in July 2024 as part of Phase 2 of the government's economic plan to eliminate the Central Bank's interest-bearing liabilities.

The economic team has already announced that starting July 10, it will no longer allow banks to subscribe to these bills and that they will cease to exist by the middle of next month. The immediate effect will be an "endogenous" interest rate, regulated by the market itself, and the City expects this to translate into lower yields.

Therefore, going forward, the expectation is that the financial bicycle will lose some of its appeal . "The current level of the dollar, combined with a sharp relative drop in HD Bonds compared to their peers in the last month, and peso rates close to yearly lows, create a scenario favoring dollar-denominated assets," Delphos agreed, adding: "This scenario makes the risk-return ratio for carry trade positions less attractive, where significant drops in the exchange rate and interest rate levels reduce potential gains, while the risk ahead of the elections and a lower potential liquidation of the agro-export sector increase the risk of positioning in pesos."

Economists Pablo Repetto of Aurum Valores and Martín Polo of Cohen agreed on this point. "The government's goal is to sustain the carry trade until (at least) the elections. It will be difficult given the drop in agricultural sales and a possible fall in the nominal interest rate, which should be accompanied by the disinflationary process," Repetto said. " Less sales and the approaching elections, plus a possible drop in the interest rate (if it materializes), should affect the carry trade strategy, but we do not rule out the government finding mechanisms to sustain it."

Polo noted: "The exchange rate, which is already below the center of the band, is going to have a more stressed second half of the year, with fewer agricultural sales and more demand for external asset formation. It's starting to become a much riskier strategy."