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Tuesday, March 28, 2023

Dollar: Is the carry trade back?

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In theory, the investor has dollars (or borrows them at a low rate), which he exchanges for pesos, invests them in any asset in pesos that earns him a profit, and after a certain time, buys dollars again. Carry is called the profitability that is obtained while we have the investment.

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Of course, you can invest in any asset in pesos. And the capital market offers good instruments for this, such as discount Treasury bills (TNA yields 86% in May), sureties, CER instruments (that adjust principal and interest against INDEC inflation).

After the rise in January, the dollar stock market stabilized. In February, the MEP closed at $357.5, marking a rise of 0.7%. Let’s see how some instruments fared.

In the following table we show examples of this strategy for different assets, assuming that the investor had USD 10,000 and changed them at the beginning of the month to $354.8, obtaining $3,548,000, which he placed in different alternatives. For example, if he had made a fixed term (TNA 75%), at the end of the investment he would have collected $3,752,010, and repurchasing dollars at the MEP of $357.5, he would have obtained usd 10,495, a profit of usd 495, or 5% . Or you could have invested in March Treasury Bills and gotten a similar return. The reader can see each particular case.

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Those who bet on equities lost through profit taking after the impressive rises that occurred since October. And those who held hard dollar bonds got the worst of it, losing between 8 and 11%. The greatest risk is not always rewarded.

But going back to the carry trade, for the strategy to work, the rate in pesos must be higher than the rise in the MEP. Since this will ensure that I can buy more dollars than I had at the beginning.

How much should the MEP rise for the strategy to stop being profitable?

The answer is simple. In the absence of expenses, if the MEP rises more than the profit rate in pesos, for example, it rises more than 6%, the strategy is no longer profitable. The dollars to buy are more expensive than at the beginning, therefore I buy less. At current values, a dollar greater than $378.5 already takes us out of the game.

Based on all of the above, it is easy to conclude that the main risk is that the exchange rate will escape and you will be able to buy fewer dollars. That is why it is a strategy that requires the investor to have a high risk tolerance and the need to monitor it periodically to react quickly to a rise in the dollar.

It is difficult to predict how much longer the stock dollar will stay calm, given the government interventions, with an IMF likely to prohibit the government from doing so as the level of reserves is low. The BCRA is unable to buy foreign currency in the MULC to recompose it and on top of that, the countryside, the main provider of foreign currency, is facing the worst drought in 60 years. Let’s remember that in mid-January Massa announced a US$1 billion public debt buyback program that was later extended. It is likely that the IMF will suggest stopping allocating the few dollars for this.

financial adviser

Source: Ambito

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