Argentina to loosen its currency policy and build reserves

Argentina has loosened restrictions on currency trading and said it will start to rebuild foreign reserves, taking advantage of growing investor confidence in the President Javier Milei’s government to shore up its fragile finances.

Beginning in 2026, the peso’s trading bands will expand at the same rate as monthly inflation, instead of the current one percent pace. Prices rose 2.5 percent in November, meaning the bands could expand at more than double the existing pace in the near term. 

The Central Bank will also start building up its reserves, aiming to buy US$10 billion next year in a base case scenario, which could rise depending on monetary demand, according to a statement Monday. Initially, reserve purchases “will be aligned with” up to five percent of the daily volume in Argentina’s currency markets. The monetary authority may also purchase dollars in block trades. 

Argentina’s currency policy of trading bands remains the “best regime” for the economy and new changes to the bands are still aligned with a path of lower inflation, Central Bank Governor Santiago Bausili said at a press conference following the announcement. The International Monetary Fund and US Treasury were made aware of Argentina’s policy changes, Bausili said. 

The Argentine Treasury’s participation in the currency market – it purchased US$320 million outside the market on Monday – has been “very tied to meeting debt maturities,” Bausili said, adding that once the country regains access to international capital markets, the need to purchase dollars will diminish. 

Argentina’s sovereign bonds jumped across the curve on the news. Notes due in 2035, some of the most liquid, were up more than one cent to almost 73 cents on the dollar. Yields on the debt are just over 10 percent, a level officials have signalled to investors they would be comfortable issuing new bonds. 

The country has been locked out of the market since it defaulted for the third time this century during the pandemic. Milei, a libertarian economist, has made regaining access to debt investors by early 2026 a key goal since he took office in 2023. A comeback would also give the country an infusion of dollars it could use to pay back foreign debts – it has about US$4.5 billion due in January, and a similar amount for July – and rebuild its depleted hard-currency reserves.

The new measures heed investor calls for a more flexible foreign exchange policy as analysts had warned about an overvalued currency for much of Milei’s first two years in office. They’re also the most significant policy changes since Argentina finalised its US$20-billion agreement with the International Monetary Fund in April. 

IMF officials warned recently that it would be “challenging” for Argentina to meet the upcoming target in the program for accumulating reserves, something that would require the lender’s board to approve another waiver. The government received a waiver earlier this year for missing the same target. On Monday, the IMF welcomed Argentina’s policy changes. 

“It’s a positive step in the normalisation direction,” said Alejandro Cuadrado, global head of FX at BBVA, adding the peso could weaken somewhat as a result of the policy change. The announcement was made after local markets closed, with the peso trading at 1,438.5 per US dollar.

Milei is entering the second half of his mandate with renewed momentum after winning big in Argentina’s congressional midterm election in October. A new Congress was sworn in last week, with Milei’s libertarians emerging as the largest bloc in the legislature while he attempts to pass a major labour reform and annual budget. 

Before the vote, Milei’s economic team had prioritised defending the peso and keeping inflation in check at the expense of not building up its reserves. Analysts saw the policy pivot as a welcome change that would likely boost bond prices. 

“This looks like an acknowledgment that the current reserve accumulation strategy has been insufficient and they are trying to calibrate it to increase the pace of reserves accumulation,” said David Austerweil, deputy portfolio manager at Van Eck Global, calling it “credit positive.” 

Reserve accumulation of “anywhere between US$10 billion and US$15 billion next year is very positive,” he added.