After pledging a free-floating currency a month ago, Argentina’s government has intervened in the market to influence the peso’s value, a move that stands in sharp contrast to its commitments to the International Monetary Fund.
The Central Bank last Friday confirmed it sold US$409 million in futures contracts on April 30 – nearly 14 percent of total open interest reported that day on the local A3 futures market – confirming what many investors had been suspecting for weeks. Looking to stabilise the market, the Central Bank lowered implied rates and facilitated cheaper Treasury financings ahead of key debt auctions.
Consulting firms believe that the intervention in April wasn’t a one-time off, but intensified the following month, especially on May 7, when the spot peso strengthened nearly six percent. That day, futures sales surged to historic highs, marking the largest increase in open interest since President Javier Milei took office.
“The dynamics observed in May suggest that an escalation of this intervention was the main driver behind the consistent decline in the exchange rate during the month,” Gabriel Caamaño, an economist at Outlier Economy & Finance, wrote in a recent note to clients. The research firm estimates the Central Bank’s current short position is close to US$1 billion, potentially even higher.
It remains unclear whether the intervention raised red flags at the IMF. Under the agreement signed in April, Argentine authorities did not expect to intervene in the non-deliverable futures (NDF) or parallel markets unless disorderly conditions emerge.
While the IMF hasn’t publicly criticised the Central Bank’s recent move, a person with direct knowledge said it will be reviewed as part of the formal assessment of Argentina’s monetary and exchange rate policies.
An IMF spokesperson last week said “the fund continues to support the authorities in their efforts to create a more stable and prosperous Argentina,” adding that “there is a shared recognition with the authorities about the importance of strengthening external buffers.”
Argentina’s Central Bank didn’t immediately respond to a request for comment.
To be sure, Argentina will very likely receive a US$2-billion disbursement from the IMF in June after the next review of the US$20-billion programme. Although policymakers are deviating from what they indicated to the fund regarding futures, they’re still complying with two of the three key criteria of the deal — an improvement from the previous government that at one point missed all three.
The Central Bank’s interventions have created a clear financial incentive for investors. On May 7, trading volumes surged and the spread between yields on peso bonds and peso futures — the so-called synthetic dollar — widened to around 20 percent, compared to seven percent to eight percent for instruments linked to the dollar, said Pedro Morini, head of strategy at brokerage firm PPI.
The synthetic position, created by combining peso bonds with currency hedges in the futures market, reflects the market’s implied return on a dollar-denominated investment in pesos.
While that advantage has narrowed in recent weeks, it offered attractive coverage for investors betting on peso-denominated Treasury bonds, aligning with the government’s goal to maintain fiscal and financial surpluses. Officials have already announced the launch of a five-year, fixed-rate peso bond, targeting international investors. Those who hedged with futures in recent weeks were able to do so at a relatively low cost.
Investor concerns about Argentina’s compliance with its IMF agreement extend beyond the futures market. Under the deal, the country has committed to increasing its net international reserves by US$4.4 billion by June 13 — the first in a series of targets outlined in the recently signed agreement. However, estimates from private economists suggest that the Central Bank remains far from meeting this goal, making a waiver appear increasingly inevitable.
Adding to the uncertainty, Milei and Economy Minister Luis Caputo have repeatedly downplayed the importance of accumulating reserves at the Central Bank. Finance Secretary Pablo Quirno conceded Monday that “the reserves target is a number that will have to be accumulated.”
The market is already pricing in that the reserves target won’t be met, Morini said. According to his estimates, Argentina needs to accumulate another US$5 billion to hit the mark. “That’s why bonds haven’t recovered from their recent highs and country risk remains elevated,” he said. “It’s an extremely ambitious goal.”
This week’s sale of new peso-denominated bonds, which can be purchased in dollars, aims to help the Central Bank build reserves. In addition, authorities have announced a US$2-billion repurchase agreement with international banks, of which approximately US$500 million would be eligible to count toward the reserve target.
“The math doesn’t add up. But we hope it doesn’t cause a stir at the IMF,” Morini said.
by Ignacio Olivera Doll, Bloomberg
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