Argentina defends peso as emerging markets stumble

Argentina defends peso as emerging markets stumble

Central bank raises interest rates to 33.25% just six days after last tightening

Benedict Mander in Buenos Aires and Robin Wigglesworth and Pan Kwan Yuk in New York

Argentina raised interest rates for the second time in a week after more than $5bn of central bank intervention failed to stop a steep fall in the peso, highlighting the intensifying pressure on emerging market currencies in recent weeks.

The country’s central bank on Thursday again took markets by surprise as it raised interest rates by three percentage points to 33.25 per cent, just six days after it had lifted them from 27.25 per cent to 30.25 per cent.

But even this was not enough to stem the peso’s decline, and the Argentine currency fell to an all-time low on Thursday.

“The central bank needs to shock the market and regain their credibility,” said Federico Kaune, head of emerging market debt at UBS Asset Management. “This is too gradual, so they’ll probably have to have another emergency meeting very soon and hike rates even higher.”

A rally in the US dollar and the prospect of rate rises by the US Federal Reserve have sapped emerging market currencies worldwide, with JPMorgan’s emerging markets FX index falling 6 per cent since the end of February.

While few currencies have been as hard hit as the Argentine peso — which has now lost around a quarter of its value over the past year and broke through the 22-per-dollar barrier on Thursday — sentiment towards markets in the developing world has soured broadly in 2018. Although many of the biggest victims, such as Argentina, Russia and Turkey, have been hit by idiosyncratic factors, the recent rise in US Treasury yields and the dollar have weighed on stocks, bonds and currencies in emerging markets.

The three-month Libor rate, a pivotal short-term borrowing benchmark, has climbed to a 10-year high of 2.36 per cent, hobbling the popular “carry trade” of borrowing in dollars to invest in higher-yielding EM currencies.

Emerging bond and currency markets in Asia were flat as of the middle of Friday’s trading day.

The yield on India’s 10-year sovereign bond was up 0.4 basis points while the yields on equivalent debt from Indonesia, Malaysia and China were down 0.1bp, 1bp and 0.3bp respectively. Currency markets in Asia also proved resilient against the US dollar, with the Indonesian rupiah weakening 0.04 per cent, the Indian rupee strengthening 0.01 per cent, the Chinese renminbi gaining 0.12 per cent and the Philippine peso strengthening 0.17 per cent.

Latin American countries and companies are particularly prolific borrowers in dollars, and if US Treasury yields and the greenback keep climbing it could force more central banks into aggressive interest rate increases to defend their currencies, S&P Global warned in a report on Thursday.

“More restrictive domestic monetary policy and capital outflow pressures, without an improvement in domestic political or economic conditions, would seriously threaten to derail the economic recovery that most Latin American economies are currently experiencing,” Elijah Oliveros-Rosen, an economist at the rating agency, said in the report.

The FTSE Emerging index of stocks in the developing world fell for a third straight day on Thursday, to its weakest level this year. JPMorgan’s EMBI index of EM bonds has lost 4 per cent so far in 2018, to trade at its lowest since April 2017. Argentina’s peso is the worst performing EM currency this year, and the 100-year bond that Argentina issued to much fanfare in June 2017 slipped further to trade at a new low of 86.90 cents on the dollar.

President Mauricio Macri’s government has sold more than $100bn of bonds on international markets since it came to power two and a half years ago. “The central bank is in charge of the situation,” Marcos Peña, the cabinet chief, told reporters on Thursday. “Situations of volatility [like this] shouldn’t scare us: they have to be part of learning to live with a floating exchange rate.”

A stronger dollar will make it more expensive for Argentina to service its foreign debt, which has grown sharply since Mr Macri took power and financed a “gradualist” economic programme to reduce Argentina’s bulging fiscal deficit.

But the central bank’s “desperate” attempts to stem the currency’s decline shows that this “excessive gradualism is backfiring on the authorities, and has made Argentina one of the most fragile EMs today”, Marcos Casarin, head of Latin America at Oxford Economics, wrote in a note.

Although the initial sharp slide in the peso last week was triggered by foreign investors unwinding positions in local debt instruments ahead of a new capital gains tax, the problem was compounded by edgy Argentines who rushed to swap their savings into dollars.

“There is an inbred paranoia that the currency is going to go haywire at any point in time,” said Walter Stoeppelwerth, head of research at Balanz Capital, an investment bank in Buenos Aires, pointing out that only 17 years ago, the peso was at par with the dollar. “Argentines are more sensitive to foreign exchange risk than any other nation on earth except perhaps Venezuela.”

The nervousness among Argentine savers has been exacerbated by a broader feeling of fatigue with the government’s programme aimed at “normalising” the economy after the departure of the former leader Cristina Fernández de Kirchner.

“People are tired with the adjustment, it feels like it will never end,” said Luis Secco, an economist, pointing to continued utility tariff increases as the government attempts to phase out unsustainable subsidies implemented by the previous administration. He also criticised the failure of the authorities to clarify the situation to the markets.

“There is a lack of expectations management, the market is feeling a bit orphaned. No one is very clear why the central bank is doing what it is doing,” Mr Secco added.

Additional reporting by Emma Dunkley in Hong Kong

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