Market Strategy - More Black-Market FX Weakness Ahead - 29 JULY 2013

The black-market exchange rate of pesos for US dollars paid in Argentina, also known as the "blue" rate , has begun to weaken again, in line with our view that government efforts would be insufficient to combat depreciatory pressure on the Argentine peso, eventually prompting the authorities substantially revalue the currency. T he Argentine government launched a concerted effort to shore up its rapidly deteriorating external account position starting in early May, introducing policies aimed at bringing foreign currency deposits into the financial system in exchange for tax amnesty and investment certificates that could be redeemed for foreign currency at a later date. However, there has been little interest so far in these new investment vehicles, and it appears that demand is once more on the rise for foreign currency , with the "blue" dollar exchange rate falling from ARS7.930/US$ on July 1 to ARS8.750/US$ as of July 17, 60 .7% weaker than the official exchange rate of ARS5.445/US$.

We believe that the depreciatory pressure on the Argentine peso will continue to build , as domestic consumer price inflation remains high and households do not have confidence in the local currency for their long-term savings. Over the medium term, these dynamics, combined with a narrowing trade surplus, dollar-denominated foreign debt payments, and a widening budget deficit, will continue to exert downward pressure on the country's foreign currency reserves. We forecast a devaluation of the peso in 2013 in response to these pressures, and although we acknowledge growing risks to this view ( see ' Risks To Devaluation View Grow', July 9 ) , the alternate scenario we find most likely is an acceleration in the gradual pace of peso weakening that has been the government's policy for the last several years.

Dollar Scarcity To Keep Pressure On Black Market Rate
Argentina - Implied Premium To Buy Dollars In "Blue" Market Compared To Official Exchange Rate, %

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