Argentina investors are increasing bets that President Javier Milei will devalue the peso after midterm elections this month as the government depletes its reserves to prop up the ailing currency.
The Treasury intervened for a seventh straight session on Wednesday, according to two people with direct knowledge of the matter. It had already sold an estimated US$1.5 billion in the previous six sessions, pushing greenbacks into the market to boost the value of the peso.
In recent weeks, the government has been intervening on several fronts to prevent the currency from sliding further, reinstating some exchange controls and selling dollars in the futures market. But the more the government has to do to prop up the peso, the more it becomes apparent that the current exchange rate is unsustainable, fueling the very run on the currency the authorities are trying to halt.
“The market seems to be pricing in an FX regime change the day after the elections, which means that the closer we get to the date, the more pressure builds up on the exchange rate,” said Santiago Resico, an economist at brokerage firm one618. “The fact that the Treasury is selling large amounts of dollars every day clearly doesn’t help.”
The government is looking to prevent a slump in the peso that would fuel inflation ahead of the midterms on October 26, in which half of the seats in Congress are up for grabs. Milei needs to gain support in both chambers to advance his most challenging economic reforms.
The Central Bank, which burned through US$1.1 billion in reserves last month to prop up the currency, has been relying on Treasury cash to keep it stable lately. While the monetary authority can also step into markets, it can only do so if the peso breaches the trading band set as part of Argentina’s deal with the International Monetary Fund.
The outlook for Argentina deteriorated after Milei suffered a heavy setback in a local vote in Buenos Aires Province in early September amid growing economic woes and as corruption scandals tarnish some of his closest allies. A pledge of aid from the United States helped halt the sell-off, but not reverse the slump.
For now, the most popular base case scenario is for the government to get between 34 percent and 37 percent of votes in the upcoming election, Barclays economist Ivan Stambulsky said in a report to investors last week. Under those circumstances, Milei is still expected to be able to keep governing by veto and decree.
But lawmakers in the lower house are scheduled to debate legislation that would limit the use of presidential decrees on Wednesday, according to the chamber’s agenda. That could further crimp Milei’s ability to push through reforms in the second half of his term.
Dollar sales and election jitters have fueled volatility in the bond market, said Paula Gandara, chief investment officer at Adcap Asset Management in Buenos Aires.
After posting a strong rally on Monday, notes maturing in 2035 fell over a cent the following day as the government continued to inject greenbacks into currency markets. On Wednesday, the bonds declined again, leading losses in emerging markets.
“Markets want them to devalue the currency and allow it to be a free floating rate. No more bands, no more intervention,” said David Austerweil, emerging-markets deputy portfolio manager at VanEck in New York. “It’s going to happen one way or the other.”
by Nicolle Yapur, Bloomberg
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