Argentina's Central Bank Steps In to Halt Currency Decline

  • Currency remains worst performer in emerging markets this year
  • Central bank intervened last week for first time since float

Argentina’s central bank stepped in to halt the slide in the peso for the second time since new authorities took over in December as a devaluation and floating of the currency has made it the worst performer in major emerging markets this year.

The peso weakened as much as 1.9 percent to 15.58 per dollar, before closing 0.3 percent stronger at 15.25, according to the MAE electronic trading platform in Buenos Aires. The currency has lost 16 percent of its value in 2016, the most of 24 emerging market nations and three times the move of the second-worst performer, the Mexican peso. The bank sold $119 million to prop up the peso in the currency market, according to an e-mailed statement.

“Foreign exchange rates above certain levels put pressure on inflation and the BCRA has a good incentive to act in that case,” Puente strategist Alejo Costa said.

After President Mauricio Macri removed currency controls following his Dec. 10 inauguration, the government managed to limit the depreciation through an agreement with agricultural exporters to sell about $4 billion worth of soybeans, corn and wheat that had been held by farmers waiting for a better exchange rate. In recent weeks, however, farm exports have shriveled and central bank reserves have fallen about $1 billion to $29 billion.

“The central bank should intervene more to control the pass through from the devaluation to consumer prices amid salary talks,” Hernan Yellati, the head of research and strategy at BancTrust & Co., said by telephone from Miami. “They should also raise rates at the auction to keep excess pesos from chasing dollars.”

The bank will sell 35-day to 252-day notes at its weekly auction on Tuesday. Last week, it sold 57.7 billion pesos ($3.8 billion) of similar securities yielding 30.5 percent for the shortest maturities to 27.5 percent for longer-term notes.

Last Thursday, the government intervened in the currency market by selling $41.3 million for the first time since controls were removed in December. Since then, agricultural exporters have reduced their sales and importers with automatic authorizations have applied further pressure.

The Argentine government’s coinciding negotiations with holdout creditors in the U.S. and federal unions back home will prove pivotal. If South America’s second-largest economy regains access to the international debt market, as Ezequiel Aguirre, strategist at Bank of America said he expects, inflation will lower over time. Wage negotiations between the federal government and teachers’ unions could signal large pay increases. This would keep inflation high and lead to currency depreciation, Puente’s Costa said.

With most official statistics suspended until Macri completes an overhaul of the previously questioned Indec agency, the government said San Luis province and the City of Buenos Aires could be references for consumer price gains. San Luis said Tuesday that prices have risen 35.1 percent annually and 4.2 percent in January from December.

"It’s a negative precedent," Costa said.

Three-month non-deliverable forwards show traders expect the peso to trade at 15.75 per dollar while onshore futures contracts show the peso at 15.8 in 90 days. BancTrust’s Yellati says he expects the peso will close 2016 at 18 to 18.5 per dollar.

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