Argentina’s peso is tumbling to a record low in the unregulated market, where investors buy and sell dollars to skirt capital controls, on concern the government is exhausting its ability to defend the currency.
The so-called blue-chip rate, set by price differences of Argentine securities in local and international markets, reached 4.6818 per dollar, its weakest ever, while the official peso was 4.1950. The gap is the widest since November 2008. Yields of government peso bonds due in 2033 rose 47 basis points to 10.8 percent in the past five trading days, while dollar bonds of the same maturity rose 84 basis points to 12.35 percent, in the same period.
The central bank’s support of the peso has made it the only major emerging market currency to strengthen this month, gaining 0.8 percent as Brazil’s real plummeted 14 percent. The surge of the peso in the unregulated market reflects speculation that the use of reserves, which have dropped 5.7 percent this year to a 14-month low of $49.2 billion, will leave policy makers without resources to continue their policy, said Juan Pablo Fuentes, a Latin America economist at Moody’s Analytics Inc.
«The drop in reserves is already getting to a point where it raises flags,» Fuentes said in a telephone interview from West Chester, Pennsylvania. «It’s creating a cycle where the more reserves fall, the more people try to get out because there’s concern the central bank will eventually not have enough dollars to intervene in the same way.»
The use of reserves to pay debt, along with accelerating capital flight is reducing the bank’s funds, Fuentes said.
Discourage Speculation
Policy makers on Sept. 20 sold around $700 million in futures contracts due through October to show investors they are maintaining a policy of sustaining the peso and to discourage speculation in the currency, said a central bank official who asked not to be named because of the institution’s policy. The bank buys and sells dollars in futures markets on a regular basis, he said.
«The bank told people ‘don’t buy dollars because you’ll end up paying more,'» said Fernando Izzo, a currency trader with ABC Mercado de Cambio in Buenos Aires. «It doesn’t understand that people want to keep buying dollars.»
The central bank became a net seller of dollars in August for the first time since February 2010, offering $928 million to stem the peso’s decline and reversing a previous trend of buying dollars, which were flowing into the country from record grain exports, to make the currency more competitive. It sold dollars for 19 straight days to Sept. 9, the longest streak since March 2009, according to the latest bank data.
‘Weaken Faster’
«There’s the expectation that this rate of depreciation isn’t going to be maintained and the peso will weaken faster,» Fuentes at Moody’s said. «All the signals the central bank wants to make don’t matter because the market knows it’s not independent, and if the government wants to weaken the peso to fuel the economy it’s going to do it.»
The extra yield investors demand to hold Argentine government dollar bonds instead of U.S. Treasuries rose 55 basis points to 972 as of 10:30 a.m. New York time, according to JPMorgan Chase & Co.’s EMBI Global index.
The cost of protecting Argentine debt against non-payment for five years with credit-default swaps rose 56 basis points to 983 yesterday, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
Unregulated Market
In the unregulated market, the peso will strengthen when investors see a continued slow weakening of the official rate after Oct. 23 elections, in which President Cristina Fernandez de Kirchner is set to win a second term, said Carola Sandy, an economist who covers Latin America at Credit Suisse Group AG in New York.
«The government will continue with its policy of allowing a very gradual depreciation of the peso because it depends on the exchange rate as a nominal anchor for inflation,» Sandy said. «It will use all the reserves it needs to sustain the exchange rate.»
Still, some investors see the discrepancy between the peso’s depreciation and the level of inflation as a sign the currency will have to decline to maintain competitiveness, according to Izzo at ABC Mercado de Cambio.
Consumer prices rose 24 percent in the 12 months to the end of August, according to opposition lawmakers, who use statistics prepared by eight researchers, while the peso fell 5.7 percent over the past year. The difference helped the trade-weighted, inflation-adjusted exchange rate, or real effective exchange rate, appreciate 8.5 percent in the past 12 months.
«People don’t trust in the government to maintain its exchange policy after elections,» Izzo said. «There’s speculation the dollar is lagging and should appreciate faster because of inflation.»
Source: sfgate.com