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 2008.

The prolongation of the turbulence in the international financial markets, coupled with a misalignment in the demand for money unrelated to the situation of the financial system or local macroeconomic fundamentals, led to a process of portfolio change in favor of foreign assets. This generated, despite the record surplus of transfers for goods and a good performance of income from foreign direct investments and financial loans, a deficit of about US$ 3,600 million in operations with customers in the local exchange market during the second quarter of 2008.

As observed during the third quarter of 2007 after the beginning of the financial turbulence in global markets, the Central Bank’s risk management approach to temper the effects of the crisis on the foreign exchange market and on domestic variables, and to modify the framework of expectations, was favored by the countercyclical policies adopted in recent years.

Within the framework of the managed floating policy, the Central Bank managed to normalize the foreign exchange market at the end of the quarter. To this end, it operated in the spot and futures markets, granted liquidity in foreign currency to the financial system by enabling the window of active passes in foreign currency, carried out open market operations through the purchase of securities with settlement in foreign currency and national currency and introduced a series of regulatory measures aimed at making the possibilities of increasing the supply of foreign currency in the foreign exchange market more flexible.

The BCRA’s foreign exchange sales in the local foreign exchange market totaled US$ 2,740 million, an amount equivalent to only 5% of the stock of international reserves of US$ 50,464 registered at the end of March 2008. In addition, some US$ 850 million were used for the purchase of securities with settlement in foreign currency and the granting of active passes in foreign currency to the financial system.

The current account of the exchange balance registered a surplus of US$ 4,538 million, an amount that constituted a maximum at the quarterly level. Higher net receipts from goods and other current transfers outweighed the increase in net rent payments.

Significant inflows continued to be recorded in the form of direct investments by non-residents in the non-financial private sector, which reached some US$ 770 million in the second quarter, implying a year-on-year increase of around 50%. This continues the clear upward trend of recent years in direct investment by non-residents, which is usually largely related to medium- and long-term issues.

Collections of exports of goods reached a record of US$ 17,915 million, reflecting a year-on-year growth of 29%. Likewise, payments for imports of goods also registered a new record for the MULC of US$ 12,089 million, showing a year-on-year increase of 38%.

On the other hand, the operations of the capital and foreign exchange financial account showed a deficit of US$ 7,159 million, largely explained by the aforementioned change in the portfolio of economic agents of the private sector.