markets

World's Highest Rate Has Standard Chartered Loving Argentina

Updated on
  • Strategists stay bullish on carry gains even as currency falls
  • Central bank inflation fight will determine peso’s outlook
Cars drive down Avenida 9 de Julio in Buenos Aires, Argentina. Photographer: Victor J. Blue/Bloomberg

The Argentine peso has a split personality, with analysts forecasting both big losses in the spot market and the highest total return for emerging-market investors.

The reason for the divergence comes down to inflation and interest rates. Consumer-price increases of more than 20 percent will wreak havoc on the peso’s value, but any weakness will be more than offset by the world’s highest benchmark interest rates -- at 28 percent.

“The opportunity to earn carry remains unparalleled,” Ilya Gofshteyn, a strategist at Standard Chartered, wrote in a note last week.

The bank is an outlier in expecting that the peso will actually end the year stronger, at 18 per dollar. The median forecast of economists surveyed by Bloomberg is a 7 percent drop in the spot market to 20.2 per dollar by the end of the year, while the carry trade -- borrowing dollars and buying pesos -- produces positive returns exceeding 14 percent. The peso rose 0.3 percent to 18.85 per dollar Wednesday, after slumping 1.1 percent on the previous day.

While the peso posted the biggest slide against the dollar among 31 major currencies tracked by Bloomberg last year, and is again leading the pack downward in the early days of 2018, some measures show it is still overvalued. In inflation-adjusted terms against a basket of currencies from major trading partners, the peso actually eked out a slight gain in 2017.

“We’re talking about a currency that is still strong,” said Alejandro Cuadrado, the global head of foreign exchange at Banco Bilbao Vizcaya Argentaria SA in New York, whose forecast for the peso to depreciate in the spot market matches the median estimate.

Cuadrado says the peso’s level will depend on the central bank’s willingness to keep rates high to fight inflation, even as it comes under pressure to bolster economic growth by lowering borrowing costs. Officials reduced the 7-day repo rate by 75 basis points last week, surprising economists who forecast a 125-basis-point cut. Annual inflation was 25 percent in December, far exceeding the central bank’s target of no more than 17 percent. The monetary authority will now aim for inflation of 15 percent in 2018.

“When rates are this high, there’s space for the spot to weaken and even then, you win,” said Alberto Bernal, the chief strategist at XP Securities, who sees the exchange rate ending the year at 19 pesos per dollar. “Investors have to be patient, brace for volatility and focus on the improving current accounts and foreign direct investment in 2018 as the government continues its reform agenda.”

(Updates price in fourth paragraph.)
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