Time to Short the Venezuelan Bolivar?

For longer than we care to remember the Venezuelan Bolivar has been pegged to the US Dollar.  The peg as we know is artificially sustained and reminiscent of South America in the eighties.  During the eighties, many countries in Latin America had two different currency markets: an official market where exporters were forced to sell their Dollars to the central bank, and where importers had to participate in Dollar auctions, in order to bid for the currency and be able to pay for their purchases abroad.  There was also a “black market” which ran parallel and quoted the North American currency at a much more realistic level.  This inevitably drove importers and exporters in general to do as much in their power as possible to bend, circumvent, or flatly break the law.  Neo-liberal governments in the early nineties reverted this by floating the currencies and liberalizing the markets.
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Of course Hugo Chavez and his successor, Nicolas Maduro seemed to be oblivious to this fact. After devaluating the VEB in favor of the new VEF or Bolivar Fuerte (strong Bolivar), the latter has been pegged to the US dollar for the last 10 years or so.  But all that might me coming to an end.  In recent elections the opposition gained control of the assembly which has diminished Maduro’s power, and could eventually see him out of office. The first job of any successor with half an ounce of common sense would be to float the currency, which would immediately drive it into a nose-bleeding dive. Not a bad time to be short the currency.

If it’s such a good deal, why has nobody done it yet? Well in order to short the Bolivar, you need to borrow it and pay Venezuelan interest rates on it (currently at around 15%) and get paid a US Dollar deposit rate (currently around 0%).  So timing is of the essence here. It is not enough to know that the currency is going to float, it is imperative to know when, otherwise your entire principal may disappear within a few years.

There have been adjustments to the price of the Bolivar Fuerte, which has seen it lose two thirds of its value over the long run from 2.14 to the dollar, down to 4.28 in 2010 and then down again to 6.28 in 2013.  These adjustments although massive by developed markets standards, could be dwarfed by a free flotation of the currency.

The Bolivar remains a very restricted market, so with no futures or option available to place a decent short trade, the best bet is to find someone who will hold the counter-part of a forward trade.  For the past 10 years, that would have been an excellent trade: no downside and a steady stream of 15-18% annual return. Those days will soon be over, and whoever manages to place a short Bolivar trade before it blows up is set to make a killing

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