Argentina’s Central Bank stepped up its defence of the peso on Thursday as the country’s assets posted some of the worst losses in the world, adding to the growing pressure on President Javier Milei’s government.
The nation’s Central Bank was forced to intervene in the foreign exchange market for a second day, selling a significantly higher amount of dollars to keep the peso within the limit of the trading band agreed with the International Monetary Fund, according to people familiar with the matter. Thursday’s intervention is estimated by traders to be close US$350 million, the people said, compared to US$53 million sold the day before.
Investors had hoped midterm elections next month would boost Milei’s support in Congress enough to push his economic reform agenda forward. But with his disapproval ratings on the rise, the economy contracting and a string of political setbacks — from corruption scandals to pushback from lawmakers — traders began ditching the country’s assets.
As estimates spread through the market, dollar bonds extended an earlier slump, leading losses in emerging markets. Notes maturing in 2035 were down by 4.5 cents on the dollar to trade below 48 cents, their lowest in almost a year, according to indicative pricing data compiled by Bloomberg. Argentina’s S&P Merval stock index fell more than five percent, the worst among 92 global equity benchmarks.
The sell-off is taking a toll on the currency too, forcing the central bank to step in to prop up the peso on Wednesday for the first time since currency bands were set in April. The official peso closed at 1,474.5 per dollar on the local market, just below the upper limit.
“The Central Bank will never have a problem responding when the upper limit of the band is reached,” Milei’s spokesman Manuel Adorni told journalists at a press conference Thursday.
Trading bands set by Argentine officials in an agreement with the International Monetary Fund in April gradually expand by one percent monthly in both directions, broken evenly into daily increments. The peso’s upper limit for Thursday is 1,474.83, but the nation’s official trading system only allows bids in 50-cent increments, so for practical purposes the central bank rounds off the number.
The “double whammy of FX pressure and legislative setback” adds to uncertainty surrounding the government and increases “the risks of a large leakage of reserves to keep the current FX framework or a premature and disorderly abandonment of it,” Juan Sola, an analyst at Banctrust & Co, said in a report to investors.
Even before Wednesday’s intervention, Argentina had been using other instruments — such as the Treasury selling dollars or FX futures contracts — to stabilise the peso. The government also restricted dollar demand from brokers, with the securities regulator reinterpreting an existing rule that limits them from building up their dollar positions.
But institutional bondholders might stick it out despite the situation growing more complicated in the past month, according to Alberto Bernal, chief strategist at XP Investments in Miami. “They are going to take a risk, hoping that in the national elections the government will achieve a vote higher than 35-37 percent,” he said.
For Guillermo Guerrero, head of research at EMFI Securities, valuations will be key after the dust settles. “It’s definitely been a pretty bad month for Milei, but investors should keep an eye on what the actual scenarios for the next two years are and on the administration’s strong willingness to pay.”
by Ignacio Olivera Doll & Nicolle Yapur, Bloomberg
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