Central bank is last man standing in Argentina forex market

Argentina’s foreign exchange market almost ground to a halt this week as the peso hit new lows, with the central bank as the only player keeping it from complete paralysis. On September 4, the bank sold $358mn of the $650mn traded on the peso spot market, roughly 55% of the volume, as it sought to prop up the peso. Traders say it’s become essentially the only participant offering hard currency. To put it into perspective, the last time Brazil’s central bank intervened in the FX market on August 30, it sold $1.5bn using derivatives in a session that saw total volume in that specific market of almost $38.9bn. The intervention accounted for only 3.9% of the total.
Stacks of 100 Argentine pesos are displayed for a photograph in Buenos Aires (file). On September 4, the central bank sold $358mn of the $650mn traded on the peso spot market, roughly 55% of the volume, as it sought to prop up the peso.

The lack of liquidity in the peso also means that spreads on bid and offers have widened, another factor that is convincing traders to stay on the sidelines. The spread reached almost 3.5 pesos last week, the most in at least three months, based on data from the Buenos Aires MAE electronic trading platform. Traded volume has slumped as the peso tumbled 52% in the year to date. A rout that began in April intensified last week after President Mauricio Macri said he was looking to speed up disbursements from a $50bn credit line with the International Monetary Fund. The announcement, combined with accelerating inflation and the prospect of a recession this year, spooked investors and led to a 16% drop in the peso last week alone. The peso gained 1.2% on Wednesday.

“Liquidity is improving slightly, but on Tuesday it could have been considered a broken market with scarce activity in the month,” said Alejandro Cuadrado, Latin America FX strategist at BBVA in New York. “The conclusion is that it’s too early to say that it has stabilized.” So what’s next for the Argentine peso? Investors are watching for clues from negotiations in Washington, DC, where government and central bank representatives are meeting with IMF director Christine Lagarde and her team to revise the original agreement. That will be the next catalyst to help anchor short- term expectations for the peso, Cuadrado said.

“From then on we can talk about rebuilding the market and reducing volatility,” Cuadrado added. “But it’s hard to see flows returning significantly. Appetite on dollar-bonds is trickling in, but appetite for the ARS will remain limited.”

Sources and photo-credits: Gulf Times, Bloomberg