Argentine Peso Forwards Traders Brace for Post-Election SelloffSebastian Boyd
Forwards traders are more bearish on the Argentine peso than any other currency in the region amid bets a new government will allow it to weaken following elections in the fourth quarter.
Argentine non-deliverable forwards dropped this month to their weakest level ever. The 12-month NDF climbed Wednesday to 14.125 pesos per dollar after sliding to a record 14.825 on July 13. The following day, the six-month contract slid to an all-time low of 12.15 per dollar.
Argentines typically shift assets into dollars before elections to minimize risk, BancTrust & Co. wrote in a research note to clients. Traders are also betting on a peso slump as a new government adjusts economic policy to correct imbalances caused by the current administration’s controlled exchange rate.
“It is not a question of if the exchange rate will depreciate post-election but rather how much,” Siobhan Morden, the head of Latin America fixed-income at Jefferies Group LLC, wrote in a report.
Argentina will hold first-round elections Oct. 25, and President Cristina Fernandez is barred from the race. The front-runner is Daniel Scioli, a Fernandez supporter who has said he will maintain her policies, while polls indicate opposition leader Mauricio Macri is in second place.
The peso’s value in the blue-chip swap market, where traders buy peso securities and sell their dollar equivalents overseas to skirt Argentina’s controls, plunged by almost 14 percent since the end of May to a nine-month low of 13.6598 per U.S. dollar. The 25-delta risk-reversal for Argentina shows that investors are more bearish on the currency than any other in the region.
Implied yields on Argentine forwards are the highest among major currencies. The six-month yield is 51 percent, more than three times that of the second-highest currency, while the three-month yield is 17 percent. The widening gap between three-and six-month forwards indicates traders see a selloff coming after elections.
Goldman Sachs Group Inc. economist Mauro Roca warns against expectations of a steep devaluation. Instead, he says the government may speed up the controlled depreciation of the official rate.
“People are trying to hedge against uncertainty, and in Argentina the first asset people think of to preserve the value of their investments and holdings is the dollar,” Roca said by phone from New York. “I don’t think people are expecting a sharp devaluation at the start of the next government. Everyone wants dollars ahead of the election.”
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