Argentina’s peso jumps after latest central bank intervention

Argentina’s peso jumps after latest central bank intervention

12/06/18 - 12:27 - The Argentine peso jumped at the start of trading on Tuesday after the central bank again intervened in the market, despite agreeing to an IMF condition that it would allow its currency to float freely.

The peso initially rose 1.4 per cent, capping a two-day decline that had seen the currency drop 4 per cent to a new low of 26 per dollar. It later gave up some of those gains to trade at 25.6, giving it a gain of 0.7 per cent since the start of the day. Analysts said the offer from Banco Central de la República Argentina was small but had the desired effect because liquidity in the peso is low.

The IMF agreed a $50bn rescue deal with Argentina last Thursday, which included the condition that its central bank would allow the level of the peso to be determined by market forces.

The BCRA removed the pledge it had made at the height of last month’s peso devaluation to sell $5bn in reserves at 25 pesos per dollar. It sold $1.2bn at that level and had previously used up $5bn of its reserves to stem the peso’s decline and raised interest rates to a record high of 40 per cent before approaching the IMF for help. The peso stabilised while it negotiated with the IMF, with the pledge in place.

But after Argentina sealed the IMF package and the BCRA removed the peso safety net, the currency resumed its depreciation, and on Monday the peso suffered a 2.7 per cent fall.

Paul Greer, emerging market debt portfolio manager at Fidelity International in London, said: “One thing the Fund said was to let the market find its level and stop wasting foreign reserves on giving investors a cheaper exit . . . We think we are likely to see continued depreciation over the coming weeks and months as investors continue to de-risk.” Others said the central bank was likely to escape a reprimand from the IMF. “The BCRA can credibly claim that this intervention is meant to stem outsized market volatility, rather than a measure to prevent steady depreciation,” said Ilya Gofshteyn, forex strategist at Standard Chartered Bank.

“The move at the end of the trading day yesterday [Monday] was violent. I do not expect them to defend any particular level indefinitely.”

Alejandro Cuadrado, forex strategist at BBVA, said it was “a bit surprising” for the BCRA to intervene so soon after the IMF deal. But he noted that the IMF had in December recognised the merit of limited forex intervention “to prevent disorderly market conditions and smooth excessively rapid movements in the exchange rate”.

Marcos Buscaglia, founding partner at Alberdi Partners, said the BCRA should have intervened once the IMF deal was agreed. ”People saw Friday’s depreciation as a symbol of failure so it would have been cheap to intervene [successfully] . . . instead we now have a series of fears, bonds have been doing badly, the peso too,” he said.

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