STRATEGY REGARDING CURRENCY EXPOSURE

Several readers have asked us for a strategy regarding their currency exposure. As always, rather than making predictions, we let the charts teach us their history lessons. If you visit http://www.cadivi.gov.ve/divisas/promedio.html, you will find CADIVI´s monthly summary of daily average dollar amounts “authorized” and “delivered” at the Official FX rate (2150) since January 2005. We took their figures at face value and drew the red line in the chart below. Then, we plotted the month-end closing FX rate for both the Official and the parallel FX rates from January 2005 and drew the green lines on that chart. However, to plot the FX rates we decided to invert the right axes (instead of going from 2000 to 3000, it goes from 3000 to 2000), in order to see if the green lines would move in synch with the red line. In other words, we wanted to see if the parallel FX rate goes up (Bolivar revalues) when CADIVI authorizations increase, or if it goes down (Bolivar devalues) when authorizations decrease.

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As you can see, the lines don’t correlate very well. For instance, notice how, from January to March 2005, the parallel rate stayed near 2800, although CADIVI approvals doubled from $41 million to $81 million during that period. You must remember that at the time, CADIVI had practically frozen approvals since December 2004 and everyone knew the Official rate would be devalued because the outgoing minister of finance had announced it. Well, in April 2005 the government issued yet another dollar bond (Global 2025) on top of the one it had  issued, in December 2004 (Global 2034-part 2), and that’s when the parallel rate finally retreated to 2600. Notice that afterwards, CADIVI kept pumping over $80 million in daily authorizations, which kept the parallel market improving until June 2005, when CADIVI approvals went down.

From August to October 2005, Venezuelan importers launched their seasonal dollars-at-any-cost chase to fill their expected December-demand. In the graph, you can see how this massive yearly episode pushes both the parallel market and CADIVI in opposite directions. This is exactly what is happening now. The only difference this year is that we haven’t had dollar bond auctions. Instead the administration started a new scheme that allows it to assign dollar bonds discretionarily. In 2006, the ministry has been assigning Argentinean and other bonds weekly to a chosen group of banks that were supposed to automatically sell them to the rest of us. However, as it usually happens when distributing any priced item without an auction process, this year’s methodology seems to be causing hoarding. In turn, importers had no choice but to turn in mass to the parallel market and bided it up to the levels seen on the chart, so they could fill their December orders.

The importers cycle is highest from August to October but it continues, at a lower pace, until the last week of December. For instance, on the chart, notice that last year, due to the extra-seasonal demand for dollars, the parallel market jumped when the November bonds (Global 2016 & 2020) were announced but it immediately started crashing a day later. This year, the November through December dollar-demand will be much higher than 2005´s for two reasons: First, the historical uncertainty posed by every post-electoral “February” in Venezuela, and second, the extremely sharp oil-price drop currently affecting Venezuela’s future dollar income. Hopefully, before December, the authorities may recognize the gravity of the situation and come up with another dollar bond auction. Otherwise, in spite of their weekly discretionary bond sales, we may see much higher parallel rates in November.

Since importers demand is starting to pass its peak, parallel rates are slowly coming down this week and upon seing that, Argentinean-bond hoarders are starting to sell. Since no one, but government insiders knows if a dollar bond will in fact be issued, this may be the time to start covering part of your currency risk: nothing higher than 10-20% of the total amount you intend to convert. Then, if by the last week of October, the FX rate keeps on dropping, try to cover another 10-20%. If not, you should think of converting a larger amount, but not larger than 50% of the total. Finally, with the rest of your funds do the following:

  1. Wait for a dollar bond announcement, if it occurs, convert everything on the same day of the announcement.
  2. Prepare for the no-bond alternative by picking a rate level now (together with your senior decision makers) over which you wouldn’t want to convert. Then tell your broker to automatically convert your funds at that level if the market hits it.

Above all, we recommend caution; it won’t hurt you to hedge and then wait to see how things develop.  This course of action is even more relevant now that we developed a conversion alternative that allows you to hedge without holding foreign currency, without paying hedge costs and without loosing weekly access to 100% of your funds plus interests. Please contact us at [email protected] if you would like to know more.

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