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ARGENTINA | 05-08-2019 12:35

Risks rise for Macri ahead of PASOs as markets turn sour

Just six days before the country votes, the government, Central Bank and investors are facing a fresh bout of volatility in financial markets amid trade disputes and a generalised risk-off mood.

The path to re-election for President Mauricio Macri was already complicated, given stubbornly high inflation and an economy struggling to rebound from recession.

Now, just six days before the country votes in a mandatory primary election that will act as a giant poll ahead of the October 27 first round, the government, Central Bank and investors are facing a fresh bout of volatility in financial markets amid trade disputes and a generalised risk-off mood.

Argentine bonds fell on Monday, with the extra yield investors demand to hold government debt over US Treasuries widening 53 basis points to 8.82 percentage points, according to JPMorgan Chase & Co.’s EMBI Diversified index. Dollar bonds maturing in 2046 declined 2.7 cents to 76.4 cents on the dollar, with the yield rising to 10.21 percent. The peso fell 1.7 percent to 45.40 per US dollar.

Emerging market assets retreated on Monday after Chinese authorities let the yuan weaken past seven per dollar for the first time in more than a decade. The moves come in the wake of US President Donald Trump’s latest escalation of the trade war and added to concerns of a market already unnerved by the Federal Reserve’s signal that it won’t pursue an extended easing cycle.

The headwinds will test Argentine policy makers who had until now been able to contain both external pressures on local markets as well as jitters over whether Macri’s main opponents will outperform in the primaries, which could add concern about the probability of policy continuation.

“A global risk-off sentiment and Argentina-specific uncertainty will likely cause the ARS to experience heightened volatility and periods of sudden selloffs,” said Per Hammarlund, the chief emerging-markets strategist at SEB AB in Stockholm. The peso could test the 46.5 per dollar level, according Hammarlund.

While the economy and markets have been whipsawed during Macri’s first term, he remains the favoured candidate among investors who saw him lift currency and capital controls, overhaul the statistics agency, cut subsidies and move closer to a balanced budget. Argentina is also backed by a record credit line from the International Monetary Fund.

Amid the recent turbulence, the nation’s Central Bank could sell dollars in the spot market if needed to avoid sharp moves in the peso amid an emerging market rout, according to a person with direct knowledge of the matter. Policymakers can use the monetary policy rate, foreign-exchange futures markets and the spot market to mitigate the impact on the peso, the person said.

“The ARS will maintain the correlation with EM currencies but I guess BCRA’s intervention will try to avoid any big underperformance of the peso ahead of the PASO,” said Daniel Chodos, the Buenos Aires-based head of Latin America sovereign credit strategy at Credit Suisse. He is looking to increase its Argentine bonds exposure after the primary if the government performs well.

by Aline Oyamada & Daniel Cancel, Bloomberg

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