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Argentina's peso gains as authorities ease hit of debt auction

Argentina’s peso strengthened Thursday as authorities announced they will raise reserve requirements for banks.

Argentina’s peso strengthened Thursday as authorities announced they will raise reserve requirements for banks, shoring up the currency after a key local debt auction fell short of market expectations.

The central bank increased reserve requirements by five percentage points to 50 percent, including cash and remunerated notes. They will also be measured on a daily basis instead of the previous monthly average, according to a Central Bank statement. The Treasury added an additional debt auction for Monday too.  

The moves are meant to absorb liquidity after President Javier Milei’s administration rolled over just 61 percent of maturities in a Treasury debt auction on Wednesday, threatening to inject six trillion pesos into the economy that could put pressure on the exchange rate.

The peso extended gains Thursday after the announcement, gaining as much as 1.7 percent to trade at 1,291 pesos per dollar. The parallel rate was also stronger. The currency’s reaction was anticipated by investors after Central Bank board member Federico Furiase signalled Wednesday night the decision to raise reserve requirements would be through an increase of interest-bearing assets.  

Still, an ETF tracking Argentine stocks dropped 2.6 percent, heading for its biggest daily decline since June. Argentina’s dollar bonds were leading losses in emerging markets, with the notes maturing in 2035 falling by 0.4 cent on the dollar to trade at almost 67 cents, according to indicative pricing data compiled by Bloomberg.

Although the interest rate on the new reserves has yet to be determined, this move marks a recognition that the current tools are not working properly, Adcap Grupo Financero’s chief economist Federico Filippini and head of strategy Javier Casabal wrote in a report.

The increase in reserve requirements “represents an unavoidable short-term cost to preserve FX stability and keep disinflation on track ahead of the election,” Ramiro Blazquez, a strategist at StoneX wrote in a note. “This reinforces the view that, in the run-up to the midterms, the government is prioritising disinflation over activity.”

 

Failed auction

Authorities rolled over 9.1 trillion pesos of the 15 trillion pesos in short-term papers maturing Wednesday. The total maturities represented about a third of all the money in circulation in the economy. Many investors shunned the auction even as authorities offered annualized yields of up to 69.2 percent, a record.

“Something clearly went wrong,” said Juan Manuel Pazos, chief economist at local broker One618. “They injected sixtrillion pesos at rates of up to 70 percent. I think it’s self-explanatory.” 

The failure of the auction was a reflection of a liquidity crunch in the local financial system after the Central Bank raised reserve requirements in a bid to contain inflation and ease pressure on the currency. The monthly consumer price index leaped 1.9 percent in July, compared with June’s 1.6 percent, although in line with estimates.

Analysts had warned that a debt rollover rate below 90 percent could pressure the exchange rate, as it would force the government to inject fresh cash into the economy to repay the portion of the notes it wasn’t able to refinance. That could trigger price pressures and potentially dent Milei’s approval ratings ahead of elections in the key province of Buenos Aires next month as well as mid-terms in October.

Argentina’s currency weakened more than 13 percent in July, its worst performance since Milei devalued the peso at the start of his administration in 2023. Rising dollar demand ahead of the local votes coincided with a seasonal decline in agriculture export flows, a top source of greenbacks in South America’s second-largest economy. 

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by Nicolle Yapur & Ignacio Olivera Doll, Bloomberg

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