Milei defies forecasts so far as Argentina’s peso strengthens

Traders in Buenos Aires are beginning to buy into President Javier Milei’s target of strengthening Argentina’s currency toward 1,000 pesos per dollar, even as economists warn the trend could reverse in the second half of the year when dollar supply tends to dry up. 

The currency is now trading around 1,100 pesos per dollar. It’s a surprisingly low figure for those who predicted that the removal of currency controls in Argentina would lead to a devaluation. The peso now floats freely between 1,000 to 1,400 per dollar, a major policy change unveiled as part of Argentina’s new US$20-billion programme with the International Monetary Fund.  

“The government is taking steps to keep the peso at the floor of the new floating band,” said Gabriel Caamaño, a partner at local consulting firm Outlier. 

Analysts argue that a series of signals from Milei’s government point toward a stronger peso over the next few months:

– New target: Milei said in a radio interview that the Central Bank won’t buy a single dollar until the peso hits 1,000
– Money shortage: The Central Bank slashed ultra-short-term peso lending to banks, squeezing liquidity and discouraging dollar demand
– Export tax break: Milei also warned that a temporary tax cut on commodity exports will expire in June as planned, doubling down on government efforts to accelerate shipments abroad and increase dollar supply in the local market
– Dollar inflows: The FX market was reopened to foreign investors willing to commit capital for at least six months — even as local investors remain restricted

Flows vs. fundamentals

Investors got the memo from Milei. The official exchange rate for the end of April has strengthened to 1,114 pesos per dollar in the futures market, from 1,200 just two weeks ago. Traders now see 1,000 not as a floor, but as the next stop.

“Those who said there would be a devaluation this week should apologise,” Economy Minister Luis Caputo said Monday in a post on X, touting the peso’s better-than-expected performance.

But what at first glance might appear to be a resounding victory for the government over devaluation speculators could end up being a classic case of short-term gain and long-term pain, some economists say. That’s because every year in Argentina the flow of dollars slows in the second half as crop exporters return to planting instead of shipping their harvests abroad. 

The peso is now at its strongest when adjusted for inflation since former resident Cristina Fernández de Kirchner imposed cumbersome exchange controls 10 years ago to stave off a devaluation.

The financial flows — fresh IMF funds, crop exports — underpinning the peso today are clear. But the real economic fundamentals over the long term — job growth, foreign investment, capital spending — are less tangible as the country emerges from the past two years of gross domestic product contracting. 

“Today, the peso’s appreciation is driven by financial flows,” said Guido Sandleris, a professor at Johns Hopkins University and former Argentine Central Bank chief between 2018 and 2019. “But this more appreciated exchange rate, which emerges from a free market, may not be compatible with the real fundamentals that make the current account sustainable.”

Clouds ahead

The strong peso will likely bring short-term political benefits for the government in a year it’s facing midterm elections by keeping price increases low, a key barometer for Milei’s popularity. But analysts say the libertarian president should also take advantage of the moment to build up the central bank’s depleted foreign reserves to help cushion future currency volatility.

“The Central Bank should start accumulating reserves soon, especially with the peso so strong,” Alejandro Cuadrado, head of Latin America currency strategy at BBVA in New York, said in an interview. “There are ambitious targets for reserve accumulation, and it may be more prudent to buy now than in the second half of the year, when inflows could slow.”

The government must accumulate US$4 billion in net reserves by the end of the year and pay the same amount in debt maturities and interest in July, in order to comply with its IMF programme. And externally, a sustained global market sell-off could put further pressure on the currency. 

A balanced currency market won’t be enough, according to Juan Manuel Pazos, chief economist at Buenos Aires-based brokerage one618. “The programme needs such a high exchange rate that supply exceeds demand by US$8 billion by the end of the year,” he said.

Agricultural dollars, which are flowing in strongly in the second quarter, could run out in July, and foreign capital could reverse once the commitment to keep it in the country for six months expires. 

For now, investors are on board. But the risks to Milei’s plan haven’t disappeared.