Market News

BY  Ignacio Olivera Doll

(Bloomberg) -- Investors see the Argentine peso on the verge of devaluation again, with the currency poised to change direction once more after going from one of the worst in the world in 2023 to among the strongest performers last year.

The peso took a sharp downward turn in futures markets last week after Economy Minister Luis Caputo said he still didn’t know the amount of a new program with the International Monetary Fund, which Bloomberg News reported could be about $20 billion. In a recent television interview, Caputo also didn’t commit to maintaining his currency policy, leaving the door open for FX changes soon even as he insists there will be no peso devaluation with the upcoming IMF deal.

President Javier Milei pledged in an address to Congress this month that his administration will lift all currency and capital controls by the end of this year. Caputo has echoed the point, signaling they will be gradually eliminated once certain conditions are met, such as rebuilding the central bank’s foreign reserves.

Since March 13, expectations for the official exchange rate at the end of April have worsened 2.3% to 1,132 pesos per dollar from 1,106 today. The effect in the parallel market was worse, with the peso declining nearly 5% to 1,294 per dollar.

Greater pressure on the exchange rate could hinder Milei’s plans to use the so-called crawling peg as an anchor that allowed him to curb inflation in his first year in office. His main challenge is to avoid a politically costly devaluation, especially ahead of midterm elections in October.

“The government has a problem: It can’t say much about the deal until it is announced,” said Diego Chameides, chief economist at Banco Galicia in Buenos Aires, referring to the looming IMF agreement. “If uncertainty persists, and futures rates remain higher than those of peso instruments, the incentives to sell dollars and go to peso assets are lower and the peso could remain under pressure.”

Investors responded by shifting toward the dollar. Peso assets, such as inflation-linked bonds, sold off, causing local investors to take significant losses. Argentina’s central bank was forced to sell more than $1 billion in foreign currency reserves in just six days to support the peso.

A debt auction this week, when the government is facing debt maturities in pesos, could fuel further demand for dollars. The amount on the table, 9.2 trillion pesos ($8.6 billion), is one of the largest in the last two years. “The government may have to issue short-term instruments and even consider a partial roll off of maturities,” said Adrian Yarde Buller, chief economist at local brokerage Facimex Valores.

The implicit devaluation in peso futures is more than 60% per year for the shortest contracts. That represents a depreciation five times faster than the government’s current pace.

Investors are betting on a small one-time depreciation between March and April, which would mark a break from the current 1%—per-month crawling peg. That move would be followed by a quicker rate of depreciation after the October midterm vote, according to futures contracts data from the Rofex market compiled by Bloomberg.

Traders expect the official exchange rate to decline from 1,070 to 1,132.5 per dollar — or nearly 6% — before the end of April, after which the depreciation rate should stabilize at a 2% monthly. After the midterms, the market anticipates the pace to quicken to 3% per month.

Caputo also acknowledged that three key conditions for lifting the country’s currency controls have not yet been met, including having a solid amount of foreign exchange reserves and that monthly inflation (currently above 2%) goes at the same pace as the 1% crawling peg.

The peso turbulence eased somewhat when Congress approved a government decree to move forward with the IMF agreement. Caputo also denied on social media that the government had intervened in the futures market to ease the pressure.

Milei has used the crawling peg as an anchor against inflation since the beginning of his administration in a country where producers and consumers are accustomed to setting prices in dollar terms. Devaluing the peso or letting it float could jeopardize his efforts to tame inflation.

A full float would be extremely challenging, according to Ricardo Arriazu, one of the strongest defenders of the government’s current policies among private-sector economists. “When Argentina stops thinking in dollars, floating is possibly the best system,” Arriazu told a business audience this month. “But not for today’s Argentina.”

A devaluation like the one the market is currently expecting would leave those betting on the dollar with returns twice as high on as any asset denominated in pesos. Analysts see this dynamic as dangerous because it would likely dissuade dollar holders from investing in peso instruments.

The violent swings in the peso over the past week inflicted losses on those who bought peso contracts at exchange rates weaker than Tuesday’s close. Those who bought the peso contract expiring at the end of March, which accounts for a third of the total market volume, lost a total of $18 million, according to data compiled by Bloomberg.

“Many CFOs paid dearly for these hedges,” Mateo Reschini, senior onshore portfolio strategist at Inviu, said in an interview. “The next time they hear about devaluation, they’re going to think twice.”

“Shock Therapy” is a weekly analysis column focused on finance and markets in Argentina.