Argentina to sell dollars in parallel FX market to shore up peso

Argentina’s Central Bank will sell US dollars in the country’s parallel currency markets starting Monday in a bid to shore up the peso, whose unofficial exchange rate has weakened more than 30 percent so far this year, further fanning inflation.

Economy Minister Luis Caputo called it “a deepening of the monetary framework.”

Caputo and President Javier Milei began to detail on Saturday the new strategy that seeks to contain the widening gap between Argentina’s official and parallel exchange rates. While the peso is officially sold at 919 per US dollar due to currency controls, one of the key parallel rates closed Friday at 1,405 per dollar.

In June, price increases gained speed on a monthly basis for the first time since Milei took office in December 10, according to government data released Friday. And at 272 percent, annual inflation remains one of the fastest in the world and well into crisis territory.

Caputo, who is at the Sun Valley Conference in Idaho with Milei, said the monetary authority will sell dollars in one of the parallel FX markets, known as the 'blue chip swap' or 'contado con liquidación,' to offset the emission of pesos from purchasing dollars at the official exchange rate.

“If the Central Bank purchases dollars in the official exchange market, the equivalent emission of pesos will be sterilised by the sale of equivalent dollars in the contado con liquidación market,” Caputo wrote in a series of posts on X.

The measure is likely to help narrow the gap between the official and the parallel exchange rates, but will imply lower accumulation of foreign reserves, according to a group of BancTrust & Co strategists. Reserves are needed to lift currency controls at some point, and eventually repay USS$44 billion to the International Monetary Fund.

“The negative impact of the measure on reserve accumulation could instill caution on external creditors,” they added. “But this may be reversed if the lower FX gap allows for a reduction in devaluation expectations and thus progress in the elimination of FX controls.”

Over the weekend, Argentina announced it will pay US$1.53 billion of interest due on dollar-denominated bonds under New York State and Argentine law.

Starting Wednesday, banks will resell to the central bank their put options, guarantees the monetary authority had provided to buy back notes if they fall below a certain price, Caputo said in a radio interview Saturday, without providing details. Puts represent another potential source of monetary issuance and a key obstacle to lifting capital controls.

Government officials already project the Central Bank will lose US$3 billion of reserves in the third quarter. After swiftly building back depleted reserves left by the previous administration earlier in the year, the Central Bank more recently has struggled to build reserves at the same pace as exporters sell less abroad, voicing concern that the currency is too overvalued.

In a television interview with LN+ earlier Saturday, Milei pledged to keep battling inflation while maintaining a fiscal balance.

“We need to get those pesos out of the street, and it is going to make the exchange gap fall,” Milei said, referring to the market intervention.