Amid exchange rate turmoil, government moves to contain 'bomba cambiaria'

Argentina's volatile market dynamics are nothing new. Traders, analysts and even some government officials admitted last week that the country has run out of tools and that a Central Bank rate hike would be completely futile.

In the days following the BCRA's 300 base point adjustment of the benchmark interest rate to 81 percent, the market responded with a relentless demand for dollars. The peso plunged for the 10th consecutive day on parallel markets to touch an intraday low of 484 units to the dollar.

"The Central Bank continues to lose reserves and does not have many more to lose. The market consensus assumes that, if US$5 billion or US$10 billion does not appear, this economic policy will not make it to October," says Juan Manuel Pazos, TPCG's head of strategy in Buenos Aires.

It's widely known that the government has little room to change expectations. For some time now, the market has been discounting the current administration, knowing that it will not continue after December and that the government has serious limitations to implement long-term measures.

With all the basic solutions exhausted, Economy Minister Sergio Massa, promised on Twitter on Tuesday to use "all the tools of the state to put this situation in order." These tools will include interventions in the bond market and investigations and sanctions for market players in an effort to clamp down on demand for dollars, a person with direct knowledge said.

In the afternoon, the government came out to sell local law foreign currency bonds (Bonares) against pesos and to buy global bonds against dollars in mid-winter, according to the individual.

The intervention was visibly larger than in recent days and managed to strengthen the parallel exchange rate to 472 per greenback, from a low of 484. Market insiders presume that the new strategy, aimed at containing the effects of the exchange rate explosion, will not allay concerns about the root causes.

Meanwhile, savers are taking precautions. Some financial institutions are beginning to take note of the withdrawal of dollars. The deposits in foreign currency of the private sector already fell US$580 million (down 3.6 percent) in the last 30 days measured by the Central Bank and in the financial caves the exchange rate touched this Tuesday a historical minimum of 497 per dollar.