Argentina’s market honeymoon fades as peso pressure builds

Investors are anticipating Argentina’s currency to come under increasing pressure weeks after new President Javier Milei devalued it by 54 percent, a sign that the market is souring on his initial moves.

As Milei’s economic team prepares to meet with staff from the International Monetary Fund Friday to reset the nation’s US$44-billion programme, the peso has been weakening in parallel markets used to skirt currency controls. It touched a fresh low on Thursday, risking fanning inflation already estimated to have surpassed 200 percent last month.

Milei sharply devalued the peso his first week in office and dismantled price controls on thousands of products, leading to galloping price hikes. Despite the surge, the Central Bank changed its benchmark tool for monetary policy in a bid to lower borrowing costs, effectively cutting interest rates to 100 percent from 133 percent to free up pesos for local banks and strengthen demand for treasury notes.

Officials have also continued to devalue the peso — whose swings they control — at two percent a month, a pace analysts say won’t hold long with price increases 10 times that level.

“From mid-January onwards, pressures will start to appear on the exchange front,” Adrian Yarde Buller, chief economist at Facimex in Buenos Aires, wrote in a note to clients. “We believe that the two percent monthly crawling peg proposed by the Central Bank is no longer sustainable,” adding that he expects investors “to dollarise portfolios.”

Some local investors are already heading for greenbacks. The parallel rate weakened for the fifth straight session Thursday, to 1,070 per dollar — the official rate is 811. Slashing interest rates also had a knock-on effect to 30-day bank deposits, one of the most common savings instruments in Argentina that currently pays 186 percent annualised. As a result, Argentines have pulled money out of deposits and into their checking accounts, adding peso liquidity that stands to put pressure on the currency.

The money that Argentines have in checking and savings accounts grew by 43 percent in the first 17 days of Milei’s administration, while the money they have in fixed term deposits only increased by three percent, according to Central Bank data through December 27, the latest available.

“People are not rolling over their certificate deposits and placing them in call accounts, shortening the maturity of their savings,” Melina Eidner, an economist at local broker PPI, said in a telephone interview. “The increased liquidity is a risk for inflation.”

While the IMF applauded Milei’s first moves, the peso’s looming losses stand to resurface currency policy debates, the Achilles heel of the country’s most recent saga with the lender that began in 2018.

Exporters and importers, who are largely tied to the official exchange rate, are starting to sniff another currency selloff ahead too. Exporters sold an average of US$147 million per day this week, 40 percent less than in the first three weeks of the Milei administration. Importers also have repeatedly shunned the government’s auctions of bonds aimed at helping them pay down debts owed to suppliers abroad.

It’s a major change of tone from Milei’s first two weeks in office, which marked by a rally in sovereign bonds and a calm in currency markets. The gap between exchange rates shrank dramatically, bonds rose to two-year highs and the government pulled off a record sale of peso debt.

The Central Bank took advantage of the lull and bulked up its foreign reserves by US$3 billion — a respite for a country that has roughly US$1 billion in interest payments due to bondholders next week — though its liabilities still surpass cash on hand.

“The parallel peso will weaken again in the coming months,” said Mateo Reschini, senior onshore portfolio strategist at Inviu. “The Central Bank will have to make another sharp peso devaluation when it wants to get out of the exchange restrictions. And that will undoubtedly feed back into inflation.”