The market does not seem to believe the government’s commitment to maintain the devaluation. That is why many investors are opting for a type of hedging.
Rate in pesos, hedge against inflation or devaluation? This is the question that investment advisors ask ourselves every day. The official exchange rate of the BCRA 3500, which remains at around 920 pesos per dollar, is running at an approximate annual effective rate of 27%, while so far this year, The MEP dollar has risen more than 40% and accumulated inflation is 79.8%.
However, the market does not seem to believe the government’s commitment to maintain the devaluation at 27%, since futures are trading at a devaluation rate of more than 60% per year and negotiable obligations in that currency are trading with negative yields.
While with a nominal rate and interest rates as high as those we had a year ago, it was possible to obtain rates of return above 200% in pesos versus a devaluation of the official rate contained and arbitrated by the Central Bank, the opportunity cost of hedging a devaluation of the official rate would seem to be lower.
This is because one could achieve a return in pesos of approximately 4% per month with a LECAP, given the risk of a devaluation of the official rate to “narrow” the exchange rate gap.
It would not be surprising to see an adjustment of the official exchange rate under the pretext of the upcoming removal of the PAIS tax, since if it is not adjusted, the exchange rate gap would become even wider. That is why many investors are opting for this type of coverage.
For investors: some current options on the market
- Negotiable Obligations Dollar Link; although they tend to have little liquidity, today they are operating between 4% and 10% negative by 2025, while sovereigns are at -12% in the same period.
- Unsecured Securities Promissory Notes: This is a viable option operating with positive returns but without any guarantee.
On the other hand, for those who do not want to pay negative returns or buy an unsecured instrument, they can create their own synthetic. This operation consists of buying LECAPS on the spot market and buying dollar futures with the same expiration date.
In this way, one would be creating one’s own dollar link coverage, with the rate being the difference in yield obtained by the LECAPS and the implicit rate of the futures, which today is almost at 0%.
Director of MM Investments.
Source: Ambito
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