Argentina Taking Crucial Steps Needed to Lift Currency Controls

  • Resolving futures impasse key to proceeding with devaluation
  • Banks are ordered to unwind foreign-currency positions

Argentina’s newly elected president moved closer to fulfilling his pledge to let the currency trade freely by ordering a series of steps that will reduce the central bank’s liabilities when the peso depreciates.

Financial institutions must unwind their foreign-currency positions as part of an agreement with the futures exchanges under which they will rewrite the terms of some derivatives that would have handed holders a windfall profit. Critics of the previous administration had said it was selling the currency forwards at below-market rates to prop up the peso, which analysts estimate will fall as much as 35 percent when it floats.

Federico Sturzenegger, the new central bank president, had to resolve the futures impasse before proceeding with lifting controls in order to reduce the bank’s liability stemming from the contracts, according to Rafael Di Giorno, a director at Proficio Investment in Buenos Aires. While the central bank doesn’t publish data on the futures contracts it has on its books, they may total as much as $10 billion, according to consulting firm Elypsis.

“The government has to devalue as soon as possible since they need an inflow of dollars to rebuild reserves, especially from exporters,” Di Giorno said. “If they had devalued without fixing these contracts they would have faced a huge loss.”

The central bank will likely try to repurchase the foreign-currency contracts sold by the banks, he said. Argentine banks have about $1.8 billion worth of foreign-currency holdings that will have to be unwound, according to an official at the monetary authority who isn’t authorized to speak publicly on the matter.

This Week

President Mauricio Macri, who took office Dec. 10, told a room full of executives Monday that his team is working to lift currency controls this week as he tries to rebuild the nation’s foreign-exchange reserves, which are at a nine-year low. The scrapping of a crawling peg for the peso will bring it closer to the black-market rate of 14.5 pesos per dollar, from the current 9.8 , and establish a single exchange rate after four years of controls, Finance Minister Alfonso Prat-Gay said ahead of the Nov. 22 elections.

The peso weakened 0.2 percent to 9.80 per dollar on Tuesday, in line with the government’s crawling peg policy. The blue-chip swap, a financial transactions market with an implicit exchange rate created by trading peso and dollar-denominated assets, rallied 4.2 percent to 14.33.

In a regulatory filing late Monday, the Rofex futures exchange said it had agreed to add between 1.25 and 1.75 pesos per dollar to foreign-exchange contracts opened since Sept. 29. While the central bank run by former chief Alejandro Vanoli sold futures agreements due in February at about 10.5 pesos per dollar, offshore forwards trade at 15.13 pesos. Allies of Macri had said the central bank sold the futures at artificially low prices in order to stem expectations for a devaluation ahead of elections the governing party lost.

Trading volume on the Rofex more than doubled from a year earlier to a record in October as investors sought to profit from the growing gap between prices in onshore and offshore markets.

“In the context of the situation in the dollar futures market, the Central Bank of Argentina (BCRA) will require financial entities to reduce completely their global net position in foreign currency, that includes spot and future positions,” the bank said in an e-mailed statement.

The central bank will publish the results of its weekly note auction late Tuesday, the first under Macri and Sturzenegger. The bank didn’t provide a fixed yield guidance as done by the previous administration.

Before it's here, it's on the Bloomberg Terminal.