What could happen tomorrow with the dollar and financial markets after the provincial elections?

The unprecedented Buenos Aires legislative election has put banks, funds, and investors on alert. For the first time, the district that accounts for almost 40% of the electoral roll voted outside the national calendar, and, beyond the political outcome, the dominant question in the City is how it will impact the dollar, interest rates, bonds, and stocks tomorrow.

History weighs heavily. The financial collapse that followed the 2019 primaries remains fresh in everyone's memory, when Mauricio Macri's defeat to Alberto Fernández triggered a collapse in bond prices and a surge in exchange rates . Therefore, although a less extreme scenario is expected, traders do not rule out sharp movements if the result falls far short of expectations.

Financial markets agree that the most likely scenario is a technical tie or, at best, a narrow Kirchnerist victory of between 3 and 5 points . According to a report by AdCap, an adverse result greater than 5% "would likely trigger risk-off dynamics, weaken demand for pesos, and force a further correction in the exchange rate."

Analysts expect La Libertad Avanza to fall a few points behind, but clarify that a narrow defeat shouldn't affect the market too much . "Today, prices already reflect this negative expectation for the government," explained Javier Casabal of AdCap.

In this context, a surprise victory for the ruling Libertarian party, or even a minimal defeat of less than 3 points, could unlock value in bonds and stocks. " The market is not discounting a Milei victory. If it happens, the impact could be positive and rapid on local assets ," estimated Delphos Investment.

Outlier argued that the Buenos Aires result is crucial because exchange rate policy is already fragile. A major setback for the government " would intensify pressure on the dollar and force official sales, rekindling doubts about the consistency of the exchange rate band regime ."

In this scenario, the risk is that the Treasury will use foreign currency to defend the exchange rate instead of meeting debt maturities. " Dollar investors don't like that ," Casabal warned.

For its part, LCG noted that the drain on reserves observed since the end of the currency controls requires a recalibration of the exchange rate system. "It is likely that we will move toward a floating exchange rate, albeit with specific interventions, what some call a dirty float," the consulting firm predicted.

Beyond Monday, the outcome in Buenos Aires will begin to define the future of Javier Milei's economic program. For Empiria, the official priority until now has been to reduce inflation, even at the cost of currency tensions and recession. " After the elections, the government will face the dilemma of a reset that includes a more flexible exchange rate regime and a conventional monetary policy ," the consulting firm stated.

Tonight's outcome will then determine the magnitude of this adjustment. A narrow defeat would keep prices relatively stable. A significant setback could lead to a recurrence of a currency crisis. And a setback by Milei would have the flip side of a bullish rally in Argentine assets.

In any case, the markets are already preparing for a week that, regardless of the outcome, will be highly sensitive, with the dollar at the center of attention.