Peso Becoming Top Carry-Trade Currency as Exports Soar: Argentina Credit
Argentina’s peso is becoming the most attractive carry-trade currency in the world.
The peso’s so-called Sharpe ratio, a gauge that measures the reward for the risk investors take, tripled to 10.1 over the past month through yesterday, the highest among 35 currencies tracked by Bloomberg. The peso also posted the biggest drop in volatility among emerging currencies this year, making it more appealing to investors who buy higher-yielding currencies with funds borrowed in countries with lower interest rates.
Argentina’s overnight rate of 10.13 percent compares with key benchmarks of 1 percent or lower in the U.S., Japan and Europe. Surging soybean exports are fueling the fastest economic growth since 2005 and prompting analysts to boost their currency forecast to the strongest level in two years.
“Capital is returning to Argentina, pointing to a stable currency,” said Nick Chamie, the global head of emerging markets at RBC Capital Markets in Toronto. “Combined with the yields, it is the most attractive currency in the universe we watch.”
The peso gained 0.1 percent in October, ending a nine-month slide and paring its decline this year to 4 percent. The currency will slide by 2 percent to 4.04 per dollar by year-end and drop to 4.3 by December 2011, according to the median forecast of 14 analysts surveyed by Bloomberg. In August, the analysts predicted a decline to 4.2 per dollar by yearend and 4.65 by the end of 2011.
A record soybean harvest and growing exports to Brazil and China will push growth in South America’s second-largest economy to 9 percent this year after a 0.9 percent expansion in 2009, according to the central bank. Argentina’s trade surplus widened to $1.07 billion in September, the highest in three months.
Buying the peso with dollar loans returned 0.8 percent since Oct. 1, including interest-rate payments, the third-most in six major Latin American currencies after the Mexican peso and the Brazilian real, according to data compiled by Bloomberg.
“It’s a pretty nice trade,” said Alejandro Urbina, who owns peso-denominated bonds as an emerging-market debt portfolio manager at Chicago-based Silva Capital Management, which has about $800 million in advisory and management. “It’s all about that large yield differential. The currency is very stable and the growth picture is constructive.”
Implied volatility of one-month options for the peso dropped to 4.4 percent, from 5.5 percent at the end of last year, according to data compiled by Bloomberg. Similar gauges for the South African rand stand at 15 percent, 12 percent for the Brazilian real and 11.8 percent for the Colombian peso.
The implied yield on one-year non-deliverable forwards for the Argentine peso is 10.1 percent, compared with 2.7 percent for the Chilean peso and 3.4 percent for the Mexican currency, according to data compiled by Bloomberg.
The yields that Argentine assets offer are insufficient to compensate investors for the risk that the peso may tumble, according to Guillermo Mondino, head of Latin America research at Barclays Plc in New York. The peso has lost 23 percent since 2007 and 75 percent since Argentina defaulted on its debt in 2001, the third-biggest drop in the world after the Venezuelan bolivar and Iranian rial.
Barclays and Goldman Sachs Group Inc. estimate inflation is more than double the government’s 11.1 percent rate. Economists have questioned the accuracy of inflation data since 2007, when President Cristina Fernandez de Kirchner’s late husband and predecessor, Nestor Kirchner, changed personnel at the agency that measures consumer prices. Fernandez has said the data is accurate.
“It’s a lot riskier than people acknowledge,” Mondino said. “The headline risk in Argentina is very high. When the market turns, people can get hurt very much.”
The Argentine peso is also “illiquid,” making it more difficult for investors to sell the currency when they want to exit the trade, Mondino said.
Investing in the peso-denominated money-market instruments delivered a total return of 3.7 percent this year, trailing the 15.1 percent gain in the South African rand and 14.4 percent advance in the Colombian peso, according to data compiled by Bloomberg.
“We don’t see much value in the peso relative to other currencies in the region,” said Vitali Meschoulam, a strategist at Morgan Stanley in New York.
The peso fell 0.1 percent today to 3.9594 per dollar.
The cost of protecting Argentine debt against non-payment for five years with credit-default swaps fell 31 basis points, or 0.31 percentage point, today to 601, according to data compiled by CMA. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
The extra yield investors demand to hold Argentine dollar bonds instead of U.S. Treasuries narrowed 32 basis points today to 486, according to JPMorgan Chase & Co. The gap is down from 846 on July 1.
Fernandez’s government will seek to keep the peso stable ahead of presidential elections next year, said RBC’s Chamie. Kirchner said in July that either he or Fernandez would run for president next year.
“They want to show stability,” said Chamie, who recommends his clients buy the peso in non-deliverable forwards to pick up yield.
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