A free FX market, at last

ARGENTINA - In Brief 17 Dec 2015 by Esteban Fernández Medrano

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Finally the long anticipated day came. Argentina liberalized its FX rate, abandoning irrational and anachronistic capital controls implemented towards the end of 2011. Those controls kept Argentina in a contradictive state regarding its FX-rate-regime. The official FX market was a quasi-fixed regime (or crawling peg) where the Central Bank was not willing to put its “money where its mouth was”. I.e. it did not offer market liquidity, or not enough, to defend the FX rate level it imposed on the tradeable sector. Effectively the monetary authorities wanted to take advantage of the benefits of a fixed and floating regime simultaneously. That is, to be able to define the FX rate level (fixed-rate benefit) but to maintain control of its reserves (floating rate benefit). Of course those contradicting objectives could only be implemented thought financial repression, and not without generating perverse economic incentives (export under invoicing, import over invoicing, adversely affecting FDI, artificially incentivizing USD hording behavior, etc). The new regime is announced to be a “dirty float”. That is, a market-driven FX rate, where the BCRA would be willing to defend an implicit target range, which it has not announced. The official peso FX closed today around 14AR$/US$, only slightly above the 13.8 suggested by our basic regressions presented in the last monthly report, consistent with a Current Account deficit of close to US$ 8bn . Or put differently, a comparatively strong FX rate with respect to what was the case in the past years, i.e. while capital controls were in place. The government seems to want to avoid fueling inflationary pressures with an excessive FX rate...