Bond Traders Made Uneasy by Surprise Surge in Argentina’s Peso

  • The currency has gained 11% in the past three months
  • Strong peso may hurt commodity exports, a key revenue source

An unexpected jump in Argentina’s peso is threatening to crimp exports in an economy already heading for a recession. It’s also making investors wary of buying the nation’s local bonds.

The currency has gained 11 percent against the dollar in the past three months, the biggest surge in emerging markets. The appreciation has been fueled in part by more than $19 billion of dollar-denominated bond sales in the wake of Argentina’s historic settlement with disgruntled creditors. The peso gained 0.6 percent to 13.83 per dollar on Thursday.

The peso’s strength is emerging as a headache for President Mauricio Macri, who’s seeking to jump-start growth and bolster the country’s ability to repay debt by replenishing foreign reserves. Argentina depends on farm exports for 67 percent of its revenue, a source of income that may take a hit if the currency makes overseas sales of soybeans and other grains more expensive.

“There’s a risk that the peso will continue strengthening at an accelerating pace, affecting exporters’ ability to compete,” said Alberto Bernal, chief strategist at Brazilian brokerage XP Securities LLC. “This exchange isn’t what the authorities wanted.”

On Tuesday, Production Minister Francisco Cabrera said the strong peso is a topic of “discussion” within Macri’s Cabinet.

“A dollar that’s too low creates problems of competitiveness and that is not what we’d want,” he told reporters in Buenos Aires.

The peso is also deterring investors from buying local-currency notes because they’re concerned the appreciation is likely to reverse, said Walter Stoeppelwerth, chief investment officer of Balanz Capital in Buenos Aires.

Last week, BNP Paribas recommended investors stop buying notes sold by Argentina’s central bank, saying the peso’s current level didn’t offer a favorable entry point.

Investors have piled into the securities to profit from yields as high as 38 percent. In May, the central bank restricted sales of the debt to investors with a local custody account, citing concerns that “hot-money” entering the country could destabilize the currency. The bank has now cut the yields it pays on the notes for seven straight weeks as it seeks to revive an economy that Moody’s Investors Service forecasts will shrink 1.5 percent this year.

“People want to buy local debt but are terrified of the overvalued” peso, Stoeppelwerth wrote in an e-mail. “We’re seeing more hesitation to load up on peso bonds despite the incredibly high carry offered. They’re afraid to get burned.” 

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