BUENOS AIRES (Dow Jones)–Argentina’s peso has come under steady selling pressure ahead of Sunday’s presidential election as investors seek the perceived safety of the U.S. dollar on expectations the government will let the local currency weaken at a more rapid pace.
But some economists say fears of an abrupt post-election depreciation are overblown and that President Cristina Kirchner will keep the exchange rate relatively stable, at least in the short term.
«The Argentine peso is due for a correction [but] we think that the market is consistently overestimating the depreciation risk in the short term,» Nomura Securities said in a report.
On Friday, the peso closed unchanged at ARS4.2345 to the dollar, bringing its loss against the greenback to 6.1% so far this year.
Kirchner is expected to cruise to re-election with more than 50% of the vote and her ruling coalition stands a good chance of retaking control of both chambers of Congress.
Kirchner has been careful to keep the exchange rate steady as many Argentines still see the dollar as a refuge in times of turmoil due to the country’s long history of financial crisis.
The central bank and other government institutions like pension agency Anses regularly intervene in the local spot and futures markets to keep the peso trading within a tight band against the dollar, with a bias towards a gradual depreciation to help exporters.
However, with inflation widely believed to be running above 20%, the peso has actually appreciated in real terms to the detriment of exporters.
Doubts about the stability of Argentina’s fast growing, high inflation economy as well as the government’s grip on the exchange rate have led to capital flight.
A measure of capital flight tracked by the central bank rose to $6.13 billion in the second quarter, from $3.68 billion in the first quarter. Outflows are thought to have been even higher in the third quarter.
The unrelenting demand for dollars and the central bank’s policy of allowing the peso to only gradually depreciate versus the greenback have dented Argentina’s international reserves, which fell to $47.8 billion on Friday from $50 billion at the end of August.
According to Puente brokerage, this week alone the central bank sold $700 million of its reserves to defend the peso.
While economists and market strategists disagree over just how fast the peso might weaken, there appears to be a general consensus that the government will have to loosen its managed float.
«On a medium-term perspective, we still think peso needs to depreciate faster, as the trade surplus is shrinking, the authorities insist on using international reserves for servicing external debt and inflation remains high,» Nomura said.
A common line of thought among market participants is that Kirchner will interpret what will most likely be a stunning victory on Sunday as a sign that no major adjustments are needed to her economic policies.
«This would do little to correct growing imbalances, including above-potential growth, high inflation, persistent capital flight, real peso appreciation and deteriorating external and fiscal performance,» BNP Paribas said in a report.
Source: Dow Jones