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 third quarter of 2007.

In an international context in which investors took refuge in lower-risk financial instruments (commonly referred to as “fly to quality”), in response to the crisis unleashed at the end of July with the problems of “subprime mortgages” in the United States market, added to the tensions in the interbank market in the northern hemisphere, the result of operations with clients of the Single and Free Exchange Market (MULC) in the third quarter of 2007 showed a net demand for funds of about US$ 740 million.

The policy of countercyclical accumulation of international reserves, together with the liquidity networks created in the financial system, the measures to discourage short-term capital inflows, and the strong trade surplus of goods, made it possible to reduce the impact of the international crisis on operators’ expectations, and thus cushion its effects on the exchange market and other domestic variables.

The most outstanding aspects in this regard are, on the one hand, the absence of effects of the international crisis on exchange rate movements for goods with record positive balances in the foreign exchange trade balance for a third quarter, the continuity of income from direct investments by non-residents that also reached a record income at the quarterly level since the entry into force of the MULC, and the 30% year-on-year growth in net income from medium- and long-term financial loans, and, on the other hand, the coverage of part of the net demand of customers in the non-financial private sector, with the sale in the exchange market of financial institutions’ own holdings for about US$ 500 million.

The net sales of foreign currency in the Central Bank’s foreign exchange market totaled about US$ 200 million, an amount that represented only 0.5% of the stock of international reserves at the end of the first half of the year (US$ 43,157 million) and a third of its income from the income generated in the same period, by the placements of its international reserves.

In the first nine months of 2007, the MULC result registered a surplus of approximately US$ 8,400 million, a level slightly lower than that observed in the same period of the previous year (about US$ 9,000 million). The volumes traded in the MULC in the third quarter registered a new all-time high, US$ 86,739 million, an amount 6% higher than last quarter’s record and 62% higher in year-on-year terms.

Collections of exports of goods totaled US$ 13,749 million, growing 30% year-on-year, while payments for imports of goods reached a record of US$ 10,479 million, showing a growth of 39% compared to the same period in 2006.

The current account of the exchange balance for the quarter registered a surplus 24% higher than the result of the same quarter of 2006. At the end of the third quarter of 2007, the current account with a surplus of 5.3% of GDP. For its part, the foreign exchange capital and financial account registered a deficit from operations in the third quarter, due both to the net demand for funds from the non-financial private sector (NFPS), and to the net payments of capital from the public sector and the BCRA. Meanwhile, net income from direct investments by non-residents and financial loans registered increases compared to the same period of the previous year.

In the accumulated of the first 9 months of the year, the result of foreign exchange transactions totaled a net income of US$ 10,120 million. This is the result of a current exchange account that in three-quarters of the year totaled US$ 10,302 million and a capital and financial account that showed a deficit of US$ 182 million.