Peso breaches trading limit, upends Milei FX strategy

Argentina's peso slumped on Wednesday, breaching the trading band set by the government for the first time and threatening to throw its policies to control inflation and build up foreign currency reserves into disarray.

The currency fell by almost 0.4 percent to hit 1,474.50 pesos per dollar, beyond the upper level of the band, which was set at 1,474.345 pesos per US dollar for today. The trading limits were part of US$20-billion deal Argentina struck with the International Monetary Fund in April.

President Javier Milei’s administration had tried to head off the slump in the peso by tightening liquidity, selling dollars in the futures market and restricting purchases of greenbacks. With the breach of the trading band, the Central Bank is now allowed to intervene directly in the spot market, a move that would involve tapping into its precious foreign currency reserves.

The peso’s slide also increases political pressure on Milei after his party lost a key vote in Buenos Aires Province earlier this month. That election was seen as a barometer of voter appetite for the president’s austerity policies heading into national midterms on October 26.

Following the local election defeat, authorities changed their strategy. While the Treasury stepped back from the currency market, the Central Bank moved to expand sales of dollar futures contracts. At the same time, the government restricted dollar demand from brokers, with the securities regulator reinterpreting an existing rule that limits them from building up their dollar positions.

Defending the currency band could now come at a high price, warned said Thierry Larose, a portfolio manager at Vontobel Asset Management.

“They don’t want to die on that hill,” Larose said. “It’s better to adjust the band upwards. They need to lower the local rates to avoid recession and to keep the fiscal sustainable. As long as it’s in an orderly manner, it’s fine. It is also important to avoid burning FX reserves in a battle they are unlikely to win.”