Report on the Evolution of the Foreign Exchange Market and the Foreign Exchange Balance

This report analyzes the evolution of purchases and sales of foreign currency in the foreign exchange market, corresponding to the second quarter of 2006.

The surplus of the operations of the authorized entities with their clients in the Single and Free Exchange Market (MULC), which seasonally reflects in the second quarter the income from foreign sales of the coarse harvest and other income of residents destined to finance the payment of tax maturities, showed a surplus of US$ 3,876 million in the second quarter of 2006.

With this surplus, sixteen consecutive quarters have been accumulated with positive results in transactions with customers of the entities authorised in the MULC.

The strong volatility recorded since the beginning of May in the international financial markets had a marginal impact on the local foreign exchange market, reflecting greater confidence in fiscal, monetary and exchange rate policy, and the positive effects of the controls implemented to discourage the inflow of short-term capital flows, from which, a structure was consolidated in favor of local financing in foreign currency and medium- and long-term external financing.

The Central Bank’s purchases of foreign currency in the MULC constituted the main source of recovery of the BCRA’s international reserves, which increased by US$ 3,941 million in the quarter and some US$ 7,000 million after the advance payment of the entire debt with the International Monetary Fund (IMF) in early January 2006.

Under the rules issued at the end of the second quarter of 2005 on controls to discourage short-term capital inflows, the MULC surplus, considering private sector operations exclusively, was about US$1 billion lower than in the same quarter of 2005. This year-on-year decline was largely due to lower short-term capital inflows, mainly in the form of nonresident portfolio investments and other capital inflows channelled through brokerage firms, and requirements to ensure transparency of export financing receipts.

The volume traded in the foreign exchange market continued to grow. The quarter recorded a new all-time high, US$ 56,314 million, an amount US$ 1,400 million (3%) higher than the previous record observed in the fourth quarter of 2005 (US$ 54,907 million) and US$ 5,337 million (10%) higher in year-on-year terms.

The current account of the foreign exchange balance registered a surplus of US$ 3,824 million, an amount about US$ 230 million higher (6%) than the balance observed in the same quarter of 2005 (US$ 3,591 million). This difference is basically explained by lower interest payments and higher service income, partially offset by lower net merchandise income and higher profit and dividend payments.

Collections of exports of goods registered a new record in the MULC in the quarter, reaching a level of US$ 11,753 million. This amount represented a growth of 7% year-on-year. In the composition of these revenues, the settlements of pre-financing granted by local banks stood out, which also reached a new maximum totaling US$ 1,317 million, implying a year-on-year increase of almost 50%.

A new record of payments for imports of goods was also registered (US$ 7,128 million), showing a year-on-year growth of 16%, accompanying the increase in shipments to the market consistent with the growth in the level of activity.

On the other hand, the operations of the foreign exchange capital and financial account resulted in a practically neutral balance (net outflow of US$ 56 million), compared to the net outflow of US$ 658 million in the second quarter of the previous year.

The surplus of the capital and financial exchange rate account of the public sector and BCRA (US$ 413 million) and the slight surplus of non-financial private sector operations (US$ 15 million), were more than offset by the deficit of the financial sector of US$ 311 million, explained by the recovery in its positions of foreign assets. and by the outflow for other net expenditures (US$ 173 million).

The surplus in the NFPS foreign exchange capital and financial account was mainly due to net income from direct investments and financial loans, which was virtually offset by net resident demand for foreign assets. Net demand for NFPS foreign assets decreased by almost 35% compared to the first quarter of 2006.

The surplus of the capital and financial account of the public sector and the BCRA originated in the placements of public securities, partially offset by net payments to international organizations and other debts in foreign currency.