Argentina’s Central Bank stepped into the market to prop up the peso for the first time since it implemented a trading band in April, adding to a growing list of setbacks for President Javier Milei.
The monetary authority sold US$53 million on Wednesday, according to its daily report on foreign reserves. The Central Bank had earlier disputed a Bloomberg report that the currency had crossed the ceiling of the band.
Until Wednesday, Argentina’s monetary authority hadn’t stepped in directly to shore up the peso since Milei agreed to a US$20-billion deal with the International Monetary Fund in April. Under that arrangement, Milei’s Central Bank lifted some currency controls and agreed to let the peso float freely in an established band that gradually expands one percent a month.
Once the peso hits the floor or ceiling of the band, monetary officials are allowed per the IMF deal to directly intervene. However, Milei has implemented other instruments – such as Argentina’s Treasury selling dollars or FX futures contracts – to stabilise the peso as it came under increasing pressure in recent months. The government also restricted dollar demand from brokers, with the securities regulator reinterpreting an existing rule that limits them from building up their dollar positions.
The moves reflect the pressure on Milei to keep inflation in check with a steady currency while at the same time maintaining dollar reserves so the government can keep paying its debts. With midterm elections just weeks away, the President is trying to project economic stability so he can win more support in Congress to further his agenda.
“At this stage of the game, they must move forward and there is ammunition to defend the band in a first phase,” said Alejandro Cuadrado, a strategist at BBVA in New York.
The pressure is bound to continue as the market turns more volatile heading into Argentina’s national midterms on October 26, said Paula Gandara, chief investment officer at Adcap Asset Management in Buenos Aires. “The currency is going to stay at the band’s ceiling,” she said.
The peso’s losses couldn’t come at a worse time for Milei’s government. Market sentiment in Argentina is already negative as investors question his wavering political support following a tough electoral defeat in a provincial vote in Buenos Aires earlier this month.
In more setbacks on Wednesday, the lower house of Congress rejected Milei’s vetoes of bills that would increase spending on universities and healthcare by a two-thirds majority. Those bills now head to the Senate, which is even more hostile to the government.
New government data also confirmed the economy slightly contracted in the second quarter, while economists had expected mild growth. And a new poll showed Milei’s disapproval rating reached a new high in September.
Dollar bonds, which have been lagging in the past few weeks amid the growing political turmoil, extended losses on the news. They were down some two cents across the curve to lead losses in emerging markets.
The bands set by officials in the IMF agreement gradually expand one percent monthly in each direction, broken evenly into daily increments. Using that math, the peso exceeded the 1,474.345 upper limit Wednesday when it traded at 1,474.5 to the dollar.
But Argentina’s official trading system only allows bids in 50-cent increments, so for practical purposes the Central Bank rounds off the number for the upper limit in its own calculations. That meant that the bank saw 1,474.5 as the limit, meaning no breach had taken place from its perspective.
For now, investors warn that defending the peso at the ceiling could come at a high price as the Central Bank’s net cash reserves remain very low.
“They don’t want to die on that hill,” said Thierry Larose, a portfolio manager at Vontobel Asset Management. “It’s better to adjust the band upwards. They need to lower the local rates to avoid recession and to keep the fiscal sustainable. As long as it’s in an orderly manner, it’s fine. It is also important to avoid burning FX reserves in a battle they are unlikely to win.”
by Ignacio Olivera Doll & Nicolle Yapur, Bloomberg
