Argentina Blocks Foreign Access to Local Bonds on Peso Gains

  • All central bank notes will be sold to locals this week
  • Lebac notes have gained popularity among foreign investors

Argentina is excluding foreign investors from Tuesday evening’s sale of local notes amid growing concern that a surge in dollar inflows will fuel peso gains, dimming the outlook for exports.

All the so-called Lebac notes sold this week will only be available for investors with local custody accounts and will trade just in the domestic market, the central bank said Monday, after last week restricting foreigners from notes that matured in 120 days or less. Argentina will announce which maturities will be designated as only for locals every Monday before its weekly auctions.

Officials are seeking to limit investments that they see as likely to be short term on concern that they could fuel excessive gains in the peso, putting the currency at the risk of a sudden tumble if sentiment changes. The central bank notes, which had rates as high as 38 percent earlier this year, gained popularity among foreign investors after they were recommended by Wall Street banks including Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc.

"An appreciated peso affects economic activity and reduces competitiveness," Alejo Costa, the chief economist at Buenos Aires-based brokerage Puente, wrote in an e-mail. "The central bank’s measure aims to avoid speculation and give monetary policy more traction."

The peso has gained 1.5 percent this month, the only advance among 24 emerging-market currencies tracked by Bloomberg, as dollar inflows from the soybean harvest entered the country and after the provinces of Neuquen and Mendoza sold dollar-denominated bonds overseas. Officials are concerned that so-called hot-money flows from short-term investors could fuel further appreciation.

"We can’t allow a couple of Wall Street boys to bring their money and put the cart before the horse," central bank President Federico Sturzenegger told a senate commission on May 19. "We’d like these boys to leave and remain with the exchange rate we want, and to see it strengthen at the same pace as production, the real economy, and not at the pace of the finance world, even if this is complicated in a world of open capital."

In December, President Mauricio Macri ended a crawling peg for the peso and removed most currency controls. The central bank securities, Argentina’s main tool for setting interest rates, began trading in international markets including Euroclear last year when the government scrapped most capital controls.

The peso has posted some of the smallest swings in emerging markets this month, with a three-week historical volatility of just 3.9 percent, higher only then the currencies of China and Hong Kong. The peso weakened 0.3 percent Tuesday to 14.037 per dollar as of 1:03 p.m. in New York.

"The peso is now the calmest it’s ever been since it began to float, with very few pressures," said Gustavo Quintana, a currency trader at PR Corredores de Cambio in Buenos Aires who forecasts the peso will end the year at 16 per dollar. "We’ll likely see the peso fall in the second half of the year when the harvest is over, but it’s likely going to end up stronger than most expected last year."

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