President Javier Milei\u2019s administration unexpectedly allowed the peso to weaken this week, while simultaneously moving to prevent the rush out of the currency from turning into a stampede that would reignite inflation.<\/p>\n
After burning through some US$100 million a day last week to prop up its slumping currency ahead of a key provincial election, the Treasury slashed dollar sales in the spot market, allowing the peso to weaken close to the upper end of its trading band.<\/p>\n
Economy Minister Luis Caputo said late Thursday that the Treasury had stepped back on signs the market was normalising.<\/p>\n
At the same time the Treasury was backing out of the market, though, the central bank was stepping in to defend the peso by selling overnight repos to soak up some of the cash that investors has been using to buy dollars. Data from local futures market A3 indicates the bank also revived sales of dollar futures contracts to prop up the peso.<\/p>\n
While the policies have largely worked for now \u2014 local interest rates came off record highs and foreign bonds rebounded from Monday\u2019s slump \u2014 authorities have ever less room to maneuver. The peso, which tumbled 4% Monday and continued to fall every day this week, can\u2019t drop much further without blowing through the upper band limit set by the government. The Treasury is running low on greenbacks and the central bank\u2019s dollar futures operations are beginning to approach their legal limit. Rates, while down from last week, are still at 35%.<\/p>\n
\u201cThe government is running out of instruments to act in the market,\u201d said Gabriel Caama\u00f1o, a partner at the consultancy Outlier.\u00a0<\/p>\n
\u00a0<\/p>\n
Central Bank futures now stand at about US$6 billion, Caama\u00f1o estimated, one of the highest levels on record and nearing a US$9-billion regulatory cap. Meanwhile, Treasury cash deposits in foreign currency have fallen below US$1.1 billion, limiting its scope for intervention.<\/p>\n
\u00a0<\/p>\n
Surprise<\/p>\n
The government\u2019s willingness to let the peso slide \u2013 if only moderately \u2013\u00a0came as a surprise to the market after Milei insisted their would be no change in policy following his defeat in local elections in Buenos Aires Province over the weekend.<\/p>\n
The government is employing \u201cdistraction tactics,\u201d wrote Pedro Mart\u00ednez, an economist at the consultancy PxQ in a report to clients. \u201cThey affirm that they won\u2019t change monetary\/exchange rate policy, while making substantial modifications to the system.\u201d<\/p>\n
Officials stepped back after liquidity in markets returned to normal following \u201cattacks\u201d ahead of the election in Buenos Aires Province, Caputo said on a live-stream late on Thursday. Investors had been trimming positions in Argentina ahead of the vote, and rushed to sell on Monday after Milei\u2019s party suffered a resounding loss.<\/p>\n
\u201cThis week we haven\u2019t been in the exchange market at all,\u201d Caputo said. If the peso is trading weaker because the market perceives greater risk or wants more hedging, \u201cthat\u2019s for the market to decide. Liquidity has recovered, so we don\u2019t need to show up.\u201d\u00a0<\/p>\n
Caputo didn\u2019t mention the use of repos or sales in the dollar futures market. The Central Bank declined to comment further\u00a0and the Economy Ministry didn\u2019t respond to requests for comment.\u00a0<\/p>\n
\u00a0<\/p>\n
Floor<\/p>\n
Argentina\u2019s more pragmatic approach helped halt the slide in the country\u2019s assets.\u00a0<\/p>\n
Sovereign notes maturing in 2035 gained almost three cents in the past three days, recouping part of the losses triggered by the electoral setback on Monday. The three-day climb is the steepest since June.\u00a0<\/p>\n
\u201cMarkets are focusing on how the FX regime behaves and whether authorities will need to intervene into October,\u201d said Ivan Stambulsky, a strategist at Barclays. \u201cThe few days post-election were positive in this regard, but the FX is close to the ceiling and stronger FX sales again in the coming weeks can\u2019t be ruled out.\u201d<\/p>\n
Speaking on the same live-stream as Caputo on Thursday night, Central Bank Governor Santiago Bausili said that \u201cthe exchange rate policy will not be modified in any way\u201d and that Argentina will keep the exchange rate bands.<\/p>\n
\u00a0<\/p>\n
Election fear<\/p>\n
Investors\u2019 ultimate fear is that Milei\u2019s party will lose midterm congressional elections in October, undermining his attempts to overhaul the South America\u2019s second-largest economy. To prevent that, the libertarian needs to stabilise the peso, reduce interest rates and revive growth.<\/p>\n
But with people losing faith in the peso, that is going to be a tall order.<\/p>\n
Investors including Paula Gandara, chief investment officer at Adcap Asset Management in Buenos Aires, expect volatility to remain high until the October vote.\u00a0<\/p>\n
After his party\u2019s loss on the Buenos Aires weekend vote, Milei vowed to amend political mistakes, fuelling speculation over a potential Cabinet reshuffle. But so far, the President hasn\u2019t revealed any drastic changes to his team, and early signals of closer ties with governors that could boost his standing have yet to materialise. Further setbacks in Congress could also hurt the notes.\u00a0<\/p>\n
Morgan Stanley abandoned its bullish call on Argentina after the election loss. JPMorgan Chase & Co\u00a0told clients this week to implement hedges while keeping exposure to Argentina\u2019s local bonds, seeing \u201ca more challenging path\u201d ahead.\u00a0<\/p>\n
\u00a0<\/p>\n
Peso defence<\/p>\n
Argentine assets had been under pressure even before the Buenos Aires vote, with investors lowering their exposure amid corruption allegations involving his inner circle and setbacks in congress, as well as to reduce exposure going into the vote. \u00a0<\/p>\n
In part to defend the peso, the Central Bank stepped up use of overnight, interest bearing repos, just two months after dismantling seven-day repurchase agreements known as LEFIs. Starting in late August, the new one-day security, listed simply as \u201cother\u201d on the Central Bank\u2019s balance sheets, began to appear.\u00a0<\/p>\n
The bank sold 1.1 trillion pesos of the new repos on Tuesday, pushing the stock to 4.5 trillion pesos. Yields on the repos fell to around 35 percent, down from highs of 45 percent at the start of the week after the weaker peso eased fears of a sudden devaluation, taking the pressure off local rates.\u00a0<\/p>\n
It also sold dollar contracts pushing the market\u2019s open interest up by US$125 million on Wednesday, leaving the outstanding position to about US$7.8 billion. Past data indicates the Central Bank represents about 80 percent of those positions.\u00a0<\/p>\n
\u201cThe real test will come with the turn of the month,\u201d Caama\u00f1o added. \u201cThat will be the moment when tensions could flare up again, because the electoral noise will return and individuals, who are now over-dollarised, will once again have pesos in their pockets. We\u2019ll see how much conviction lies behind this new, pragmatic playbook.\u201d<\/p>\n
\n related news\n <\/p>\n
by Ignacio Olivera Doll & Nicolle Yapur, Bloomberg<\/p>\n","protected":false},"excerpt":{"rendered":"President Javier Milei\u2019s administration unexpectedly allowed the peso to weaken this week, while simultaneously moving to prevent the…\n","protected":false},"author":2,"featured_media":19207,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[12],"tags":[138,220,111,139,69],"class_list":["post-19206","post","type-post","status-publish","format-standard","has-post-thumbnail","category-markets","tag-business","tag-markets","tag-new-zealand","tag-newzealand","tag-nz"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/19206","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/comments?post=19206"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/19206\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media\/19207"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media?parent=19206"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/categories?post=19206"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/tags?post=19206"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}