Argentina's Peso Strengthens After Central Bank Boosts Yield

  • Government looks to defend peso amid inflation concerns
  • Peso is worst performing emerging-market currency this year

Argentina’s peso rose the most in six weeks after the central bank boosted yields on its weekly notes in an attempt to curb the peso’s slump this year.

The peso rose 0.8 percent to 15.66 pesos per dollar, according to the MAE electronic trading platform, after the central bank increased yields on 35-day notes to 37 percent Tuesday from 31.15 percent. The rate increase suggests the government looks to defend the peso amid concerns that rising inflation will affect consumer prices, according to Rafael di Giorno, a director at Proficio Investment in Buenos Aires.

"Even if the central bank’s medium-term objective is to let the peso float freely, the government is concerned that if the peso falls below 16, it will hit inflation hard," Di Giorno said. "They’re curbing the peso."

Although Argentina faced positive news this week after a milestone agreement with holdout creditors led by billionaire Paul Singer, the peso fell to record lows that were pared by central bank dollar sales as demand for greenbacks remains high by importers who need to make dividend transfers, and dollar sales from grain exporters declined. The peso, which fell 27 percent the day controls were removed, has tumbled an additional 16 percent this year. That’s the worst out of 24 emerging-market currencies tracked by Bloomberg.

Argentina’s central bank is turning its back on more than a decade of managing the currency. The central bank began intervening in the peso Feb. 18 in attempts to smooth the its slide. 

“The most important thing is to have a central bank that is focused on inflation and then let the exchange rate do its job of being a shock absorber for the economy,” the bank’s President Federico Sturzenegger said at the G-20 meeting in Shanghai Feb. 26. “Intervention is to correct spikes and developments that don’t bear relation with fundamentals, not to sustain an exchange rate that is off its equilibrium.”

Nine-month non-deliverable forwards show traders betting that the peso will fall further to 17.79 pesos per dollar.

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