The market for hedging currency risk in Argentina has in effect closed just three years since its inception, after the reinstatement of capital controls in September led to a severe disruption in derivatives contracts used by foreign investors.
In the months since departing president Mauricio Macri restricted the amount of pesos that could be converted to dollars, activity in the non-deliverable forwards (NDF) market, which foreign investors use to protect against fluctuations in the peso, has evaporated.
Now, Argentina’s NDF market, which emerged in 2016 after the removal of capital controls, sees daily volume of just $30m, according to Credit Suisse — a far cry from the $150m-$400m a day of volumes typical just two months ago.
The issue stems from the fact that the true value of Argentina’s currency has become a point of debate. After capital controls were imposed in September, an unofficial exchange rate emerged, reflecting the exchange rate at which certain bonds can be purchased with pesos and then sold abroad for dollars. Using that parallel rate, the peso is valued 30 per cent below the official rate.
The Emerging Markets Traders Association, which sets protocols for overseas banks and investors active in the country, was forced to suspend NDF contracts in September after the divergence between the exchange rates was noted by its members, including bond investment house Pimco and investment bank Goldman Sachs. Two weeks later, the trade association stipulated that contracts should be settled at the official exchange rate. This has upset some investors, who argue that the move in effect killed the young market.
“If I were a bond investor and wanted to sell out of a bond, I wouldn’t be able to convert the proceeds at the official exchange rate,” said one investor who did not wish to be identified, echoing a point made by David Robbins at TCW that the unofficial rate is the “realistic rate at which you can execute”. In a recent JPMorgan survey, 80 per cent of respondents said they would prefer to use the unofficial exchange rate.
Others said the industry group had failed to consult widely about the issue and did not clarify how it determined which rate would be used. EMTA declined to comment.
Alejo Costa, a strategist at BTG Pactual Argentina in Buenos Aires, said that one side of the transaction would inevitably lose out as a result of the decision. “It is a zero-sum game in a way,” he said.
High interest rates in Argentina mean that holding peso-denominated assets can be an attractive proposition. Investors can double their money on contracts maturing in more than six months. As such, some have begun to float the idea of a new market to hedge against peso risk that is based around the parallel exchange rate instead.
“We are, as an institution, of the opinion that there are great opportunities in Argentina, but we are unable to access the local market because we can’t hedge out our underlying currency exposure,” said one investor affected by EMTA’s decision and supportive of the formation of a new market. “In its current state, I cannot imagine why any institution would want to trade these NDF contracts at a rate which is not emblematic of where financial transactions are going through the market.”
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