Argentine peso gives up early gains to end day lower

Argentine peso gives up early gains to end day lower

The relief rally did not last.

The Argentine peso failed to hang on to its early gains on Wednesday, ending lower despite the country’s central bank successfully rolling over$25bn of short-term debt in yesterday’s closely watched auction.

The battered currency, which hit a record low of 25 per dollar this week, had firmed as much as 1.5 per cent to a one-week high of 23.68 in early trading. However, it gave up all that gain to end the day down 0.9 per cent. The drop comes amid continued pressure on emerging market assets and follows yesterday’s near 4 per cent rally.

Argentina was forced to turn to the International Monetary Fund last week after drastic hikes in interest rates failed to halt the crisis of confidence that triggered a run on the peso.

While the results from last night’s Labac auctions and the country’s upcoming talks with the IMF for a $30bn credit line is expected to provide some short-term calm to the peso, analysts say long-term relief will remain very much dependent on President Mauricio Macri’s willingness to stray from his strategy of “economic gradualism” and push through tougher fiscal adjustments.

“There is no quick fix with potentially several weeks of volatility until retail investors realise that IMF doesn’t equal crisis and perhaps several months of data watch as markets question the political commitment to fiscal discipline through less favourable growth/inflation trade-off,” said Siobhan Morden, head of LatAm fixed income strategy at Nomura.

Indeed, underscoring the markets’ ongoing wariness over the country’s high inflation, widening deficits, large external debt pile and weak growth prospects, the currency remains down over 22 per cent this year, still the worst performer among the major world currencies.

Defending the peso has also come at a heavy cost to the country’s coffers. The central bank has been aggressively selling dollars as well as new fixed rate peso bonds this week to support the currency. It has burnt through more than $6bn — or over 10 per cent — of its foreign reserves over the past three weeks trying to prop up the peso.