Lipstick and Currency Bruises

A few friends returned yesterday from a Uruguayan beach expedition, bringing home confusion surrounding US dollar (USD), the Argentine peso (ARS) vs. the Uruguayan peso (UYU).  Unraveling their tale, I realized this is a story everyone should mull over to understand better the larger effects of a currency black market.

Medio Medios are probably the only fun part of Montevideo.

Upon arrival, my friends withdrew Uruguayan pesos from their US dollar bank accounts via an ATM and received 19 UYU/USD.  Later in the trip, they physically exchanged Argentine Pesos and received only 2 UYU/ARS.   A few medio medios and some mental math later, they realized this implies a rate of about 10.5 ARS/USD.   A few more and they concluded that Uruguay – cheap in dollars, not so much in Argentine pesos.

What’s happening here is massive influx of Argentine pesos into Uruguay, coupled with a bullshit overvalued official exchange rate.  Or, just because the black rate in Argentina is expressed in US dollars or sometimes Euros, doesn’t mean there isn’t a dual rate vís a vís most every other currency in the world.

Arbitrage

Sounds like a sexy high-risk international crime, but really just means that when there are two prices for one thing a clever person with adequate transportation can create a little money making loop.

For example – let’s say that in one shop, red lipsticks cost $3, and across the street the same lipstick costs $6.  Bianca, being an economist and connoisseur of red lipsticks, could take $3 and buy a lipstick in shop one and if she could resist the temptation of wearing it, sashay across the street and sell it for $6.  Using the profit, Bianca could then buy two lipsticks at shop one, then sell them for $12, and repeat this process until either she caved and wore the lipstick, or the shops wised up and both moved their prices to a reasonable $4.50.

If prices don’t equalize, Bianca will end up with all the money and shop two with all the lipstick. Poor shop one.

If prices don’t equalize, Bianca will end up with all the money and shop two with all the lipstick. Poor shop one.

The same thing happens in international currency markets, except it’s a web of prices rather than just one to one.  Kind of like lots of colors of lipsticks of varying qualities.  And instead of crossing streets and pocketing lipstick money, international currency traders sit 24 hours a day in front of multiple monitors displaying quickly fluctuating prices, jumping on even the most minor discrepancies to realize quite tidy profits.

Credit: Easy Forex Traders

Success! I’m fat and rich by thirty. Ooo Bianca wants.

And while yes, this seems like a function more or less barren of obvious societal value, these traders keep currency prices equal across countries, which allows people like you to look up official exchange rates on Google and be more or less confident you can travel to a foreign country and exchange your money for that rate.

Back to the Uruguay/Argentina/USA case though, you see the implication of a dazzling array of differing rates.   And nothing begs for a chart quite like a dazzling array:

If you can fill in the ??s do let me know.

So the answer to the question of why in the WORLD do you only get 2 Uruguayan pesos for your Argentine pesos when you’re on vacation in Punta?  If you got the official rate of 3.81, this would create a slightly less beautiful but more lucrative arbitrage loop that would look something like this:

Source: The Financial Times. hahahahaha.

Source: The Financial Times. hahahahaha.

In order to not be bankrupted by Argentina’s dual currency market drama, Uruguay has to throw a wrench somewhere into this cycle.  If they change the pink lipstick (top right), they would stop having a globally traded currency at the expense of trade, international investment, and generally being considered a real country.  They can’t control the red lipstick, so they basically change the purple lipstick to make the equation balance out.

And so my friends, this is why if you plan on financing your Uruguayan summer debauchery in Argentine pesos, you will end up footing quite a hefty bill.

 The solutions?  Use dollars.  Or euros or yen or reais or francs or really any currency that’s not from Argentina, Zimbabwe, Venezuela, or Iran.

OR (and the verdict is still out on this), put your pesos in an Argentine bank account and then pull them out of the ATM in Uruguay.   I will update once I know what that looks like.

 Image

Regardless, wear sunscreen.  And invite Bianca, that bitch could use a tan.

This entry was posted in Uncategorized. Bookmark the permalink.

One Response to Lipstick and Currency Bruises

  1. Jim Haygood says:

    On a visit to Colonia a year or two ago, before the dólar blue rate exploded, I was agog at posted forex rates which offered only 3 URU per ARS, when the implied cross-rate should’ve been around 4.5 URU per ARS. Obviously it’s only gotten worse for ARS holders since, with Uruguayan money changers apparently keying off the dólar blue rate (as they logically should).

    Given that one cannot freely wire funds in Argentina thanks to capital controls, presumably the huge haircut on the ARS forex rate compensates for forex dealers (or their mules) having to physically carry pesos back into Argentina, the only place where they are actually negotiable. Nice tribute to Evita, whose mug appears on the new hundred-peso bills.

    Anyhow, love the sassy new editorial style. Is that you on the left? ;-)

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s