Having lost more of its value than any other major currency in the world this century, Argentina’s peso has long been seen as far too unstable to lure carry-trade investors. But in a sign of just how much President Javier Milei has regained the market’s confidence in the wake of his party’s midterm-election victory, evidence is mounting that those investors are starting to pile into the peso.
After a stomach-churning stretch last year, Argentina’s currency has moved in a narrower range since the end of November, tempting foreign-exchange investors looking to harvest the peso’s rich yields. One sign that the carry trade – where investors borrow in dollars to buy the local currency – is in play can be seen in money market fund balances held in pesos, which have grown by seven percent so far in January, according to local consulting firm 1816 Economía & Estrategia.
While Argentina remains a high-risk play by any definition, obstacles that would have made the strategy unthinkable a few months ago no longer loom as large. These include a political picture that’s become more settled since Milei’s comeback victory in October gave the avowed libertarian a strong mandate to keep pursuing free-market policies that won a financial lifeline from US President Donald Trump.
Meanwhile, inflation expectations are subsiding, while strong inflows into the peso – from investors, farm export flows and companies repatriating proceeds from a recent dollar bond sale – have kept the Argentine currency aloft even as the Central Bank boosted reserves by a net US$1 billion in January. The Central Bank’s cash pile now stands at its highest level in more than four years, helping push down the country’s sovereign risk ahead of a closely-watched bond sale.
“This has happened only a few times over the past 10 years: a stretch of FX calm ahead – potentially four months – combined with historically very high real interest rates. It’s an ideal mix for putting on the carry trade,” said Belisario Álvarez de Toledo, a partner at Buenos Aires-based trading house True Grit Capital, which advises and executes orders for hedge funds.
The market’s reaction to the rare period of macroeconomic calm can be seen in Argentina’s risk premium, which has fallen to the lowest level in seven years. At the same time, peso interest rates have climbed to 38 percent, their highest in three months. Many investors are looking to hold pesos into the mid-year soybean harvest, which typically floods the market with greenbacks.
Also helping is a weakening US dollar, which has provided a boost across emerging market currencies as it slipped to near its lowest level in about four years.
“There’s a combination of local factors that’s contributing to a perception of greater FX stability,” said Diego Chameides, chief economist at Banco de Galicia, Argentina’s largest private bank. While carry strategies are inherently risky, “in a context of global USD weakness, appetite for these kinds of trades tends to increase.”
Of course, few are convinced that the periodic upheavals that have upended Argentina for years are at an end. Capital controls remain firmly in place for the country’s corporations, while many expect tighter monetary policy to eventually hurt growth. With investors ready to cut and run at the first sign of fresh trouble, the carry trade is vulnerable to swift reversals that could eat up the profits of those who linger too long.
Still, signs of steady reserve accumulation could allay doubts about the ability of Argentina – a serial defaulter – to pay its debts. Indications of growing stability could eventually help the country find its way back into international markets, according to Adrián Yarde Buller, a strategist at local broker Facimex.
“We’re seeing favourable conditions to put on carry strategies,” he said. “International financial conditions remain very supportive for the EM universe, with signs of appetite for high-risk EM debt that improve Argentina’s prospects of regaining market access soon.”
by Ignacio Olivera Doll, Bloomberg
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