Peso traders were expecting the Argentine currency to strengthen as soybean exporters exchanged record amounts of dollars after selling their harvest. Instead, the opposite happened: the peso, which has been weakening against the US currency since April, slid another four percent.
Three months after President Javier Milei lifted Argentina’s currency controls, early investor optimism has given way to growing caution. With midterm elections looming in October and mounting concerns over the country’s current account deficit, many are now hedging against a potential decline in the peso and other local assets, including JPMorgan, which started unwinding its position in Argentine peso-denominated Treasury notes.
It’s a marked change from the start of the administration, when the peso strengthened 45 percent in real terms on the back of Milei’s policies, including his efforts to slash inflation and cut government spending. But, the 2024 levels were soon viewed as overvalued, and investors now expect the Argentine peso to weaken further. That shift could pressure central bankers as they look to balance the peso without heavily tapping reserves or tightening monetary policy.
“It’s no surprise there’s pressure on the exchange rate – the real exchange rate has appreciated, the current account deficit has widened, and the country continues to face a shortage of reserves,” said Fernando Losada, an economist at Oppenheimer in New York.
The peso’s latest slide comes despite US$1.6 billion in dollar sales from agricultural exporters over the past week. Soybean farmers are converting their dollars at a remarkable pace, spurred by government incentives to front-load sales. But the supply is being absorbed all too quickly, indicating that market participants are getting ready to move out of the peso.
Demand for dollars has been on the rise, fuelled by retail investors who seek protection amid growing uncertainty ahead of the vote. Travellers and employees who received their mid-year ‘aguinaldo’ bonus in pesos are also turning to dollars. Milei’s party aims to secure more congressional seats in the upcoming elections, but public disapproval of the government remains roughly on par with approval levels, according to the latest AtlasIntel poll.
“We knew there would be FX tension ahead of the elections, but everything got pulled forward,” said Martín Polo, head strategist at local brokerage Cohen Aliados Financieros. Adding to the quest for dollars is the growing demand from corporates ahead of the elections, he said. That’s resulted in dollar-linked bonds posting returns of five percent during the past week, outperforming local debt instruments.
Futures traders are bracing for a continued peso slide. Derivatives pricing suggests another 10 percent fall by late September, putting the official exchange rate just above 1,300 pesos per US dollar. The pace of the devaluation would be nearly twice as fast as that of projected inflation over the same time period, indicating that markets are expecting more currency pain than price pressure.
The 1,200 level is now viewed as the new floor for the peso, a level that seemed distant just a few weeks ago. The government aims to keep the currency within a floating band of around 972 to 1,439 pesos per dollar, a range agreed with the International Monetary Fund.
If market expectations turn out to be true, the devaluation in the peso since the removal of currency controls on April 14 will exceed 20 percent, compared with single-digit inflation over the same period. Headwinds for the peso are growing in a country that ran a current account deficit of US$5.2 billion in the first quarter, according to the INDEC national statistics bureau.
So far, Argentina’s Central Bank has stuck to tight monetary policy, limiting the amount of money in the economy to support the peso and keep inflation in check. It has refrained from buying dollars, in line with its recent agreement with the IMF.
But that restrictive stance has begun to affect bank interest rates, which financial institutions offer to their clients to attract deposits. In certain cases, real rates now exceed 30 percent, making it more difficult for businesses and households to borrow, and holding back the economic recovery.
“Economic activity continues to show signs of fatigue. April’s rebound wasn’t enough, and the data from May and June confirm a slow, volatile and uneven recovery,” Polo said.
Signs of an economic slowdown could spell trouble for Milei on the campaign trail, and may force a looser stance on liquidity management. Last week, Central Bank authorities relaxed the liquidity coverage ratio, which sets the minimum amount of high-quality liquid assets that banks must hold, to free up cash for private-sector lending.
And, this Thursday, the Central Bank will stop offering short-term debt notes after the government decided to move toward fewer monetary liabilities and a “zero money printing” regime to fight inflation. As a result, there’s about 11 trillion pesos that banks will be able to allocate to other parts of the economy.
To soften the impact on rates, the Central Bank plans to raise statutory reserve requirements on certain money market funds to 36 percent from 20 percent, according to a recent report by Grit Capital Group. That will lower returns and likely push investors to seek better yields elsewhere.
“This puts the government in a tough spot,” Polo said. “There’s a huge amount of pesos that will have to find a new home, and that’s going to push interest rates down.” Lower rates however discourage investments in peso-denominated instruments, likely encouraging buying of dollar-linked assets. “That would be like throwing fuel on the fire,” Polo added.
by Ignacio Olivera Doll, Bloomberg
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