Brexit Becomes a Gift to Argentine Central Bank as Peso Plunges

  • Currency was seen as potentially overvalued after surging 13%
  • Weak peso may boost commodity exports, a key revenue source

Argentine central bank President Federico Sturzenegger may have found the solution to a surging peso: Brexit.

The peso dropped 2.6 percent to 15.3 per dollar on Monday and is down 5.6 percent over the past two trading days after the U.K. voted to leave the European Union on Thursday. The loss since the vote is the second-biggest among the world’s major currencies, trailing only the British pound.

Before the decline, traders and analysts had worried that a 13 percent surge in the peso in the past three months threatened to crimp exports in an economy already headed for a recession. The central bank spent 66 percent more pesos to buy dollars this year than in the same period last year in an attempt to curb the peso rally.

“Exporters will be more competitive with a weaker exchange and the government won’t have to intervene by buying dollars,” said Juan Pablo Vera, the head analyst at Buenos Aires brokerage Tavelli & Cia. “Maybe a situation of the magnitude of Brexit isn’t the best channel for a peso weakening, but it’s the one we have today.”

A strong peso was seen to be a headache for President Mauricio Macri, who is aiming to jump-start growth in an economy expected to contract 1.5 percent this year, according to Moody’s Investors Service. Argentina depends on farm exports, which are sold in dollars, for 67 percent of its revenue. During the peso’s rally, grain exporters made less in pesos.

If the currency weakens too much the central bank might sell dollars like it did in February when the peso slumped to almost 16 per dollar, Vera said. A weak peso for a prolonged period of time could stoke inflation, already at about 40 percent, he said.

The Brexit vote could also ultimately decrease demand in Argentine assets as appetite for riskier securities drops, increasing borrowing costs for companies and provinces looking to tap debt markets, said Ezequiel Aguirre, a currency strategist at Bank of America Merrill Lynch. Fair value for the peso is about 15.50 per dollar, Aguirre wrote last week before the decline.

“The currency depreciation acts as a buffer, but the net effect is still negative,” he said.

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