The return of carry trade in Argentina: a financial maneuver that yields 50% profit in dollars

If you are Argentinian and can save, you will almost certainly do so in dollars. But imagine if the government tells you that this will happen depreciate the peso at a rate of 2% per month. But if you buy pesos, you pay between 4% and 5% interest on them every month. Your financial advisor will then recommend a very simple action: exchange your dollars for pesos, buy bonds with those pesos or put them in a fixed-term interest account, and buy dollars again once the difference is harvested at the end of the month.

The difference between the government’s promised depreciation of the peso and the interest you will have received determines your profit margin. It sounds like a tongue twister, but it’s an operation with a first and last name: in Argentina it’s known as the ‘financial bicycle’; traders prefer to call it carry trade. It involves investors buying riskier currencies in the hope of pocketing enough interest to more than cover exchange rate losses.

The carry trade was a classic investment model during the Argentine dictatorship of the 1970s, revived in 2016 with Mauricio Macri, and now back again with the far-right leader Javier Milei. Argentinians who have ridden bicycles have made up to 50% gains in dollar terms in ten months, another miracle to emerge from Argentina’s macroeconomic crisis.

For the bicycle wheel to turn, a number of conditions must be in conflict: a confluence of high interest rates on the local currency together with evidence of its weakness versus an appreciation of that currency against the dollar, which implies strength. Because Argentina is generally an exception to the rule when it comes to macroeconomics, speculators there invariably skim off risky profits. Conditions are ideal at the moment. In an attempt to keep inflation under controlThe Milei government has set the peso’s depreciation at 2% per month, two points less than average inflation. And because it needs to cleanse the market of an excess of pesos, it offers rates above inflation, up to 5%, to convert them into dollars. Add to that a foreign exchange ceiling: i.e. the buying and selling of foreign currencies is controlled by the state, preventing free floating. The scenario is completed with capital laundering, which brought $12 billion into the market, which went to the banks and strengthened international reserves.

Because investors trust that Milei will defend the backward exchange rate at all costs and not give up his war against inflation, they are encouraged to trade, with faster and more lucrative profits than, for example, an investment in capital goods such as industrial machinery. This has been going on since January and for now the wheels are still turning in favor of risky investors. The consequences for the real economy are clear.

The financial bicycle is tempting, but also extremely risky. All it takes is a devaluation of the dollar to eliminate the spread between the initial investment in pesos and the repurchase of dollars. This happened in 2018, when investors who had acquired peso bonds lost confidence in Macri’s government and fled in a mass exit. The Central Bank went so far as to sell nearly $1.5 billion in reserves in one day to keep the currency’s value in check, but that wasn’t enough. In April, when the crisis began, a dollar could be bought for twenty pesos; two months later the exchange rate had already exceeded 30 pesos per dollar. What is clear to investors is that the conditions that allow them to profit from the carry trade are short-lived because, for an economy to function, they cannot be sustained.

Is Milei’s economic model, based on a lagging dollar and high interest rates, running out of steam? “The question has been asked, but for now only among the consultancy firms,” says an operator who prefers not to reveal his name. “The question is how long the government will be able to sustain the 2% monthly devaluation, with inflation hovering around 4%, without the exchange rate deterioration becoming unsustainable. Will this stabilization process also find a way not to devalue, thus eliminating the exchange rate trap, which means eliminating the gap between the dollar rates set by the Central Bank and the financial rates, which float without government intervention? he explains.

If doubts increase, why do operations continue? Well, because stratospheric profits have been made in the last ten months and what counts is the balance sheet at the end of the process. So who will lose the most? Those who entered the system late, as happens to those who remain at the bottom Ponzi-type pyramid schemes. “There is an expression among investors that flow (induced trading) kills fundamentals,” the source explains. “We could say that Argentina is expensive in dollars because of its lagging behind in the currency market, but if the government continues to intervene with reserves to keep the price of financial values low and the money from laundering also comes in, we could fall even further behind . The game is to time it right. If you are in debt in pesos and there is a devaluation, you are looking at a big loss,” he explains.

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