As Argentine peso weakens again, central bank sells $367 million in own reserves

Fawad Maqsood August 29, 2019

BUENOS AIRES: Argentina’s peso was battered on Wednesday as the central bank sold $367 million of its dollar reserves in a second consecutive day of heavy intervention aimed at controlling the currency’s fall.

The peso closed 3.1pc weaker at 58.1 per dollar, traders said.

Worries over Argentina’s ability to meet its dollar-denominated debt obligations have deepened since political uncertainty increased following an Aug. 11 primary election. The peso has lost almost 22pc of its value against the US dollar since Aug. 12.

The central bank issued a press release saying it would limit financing in pesos for major exporters, a move aimed at strengthening the local currency by encouraging companies to sell dollars in order to obtain pesos needed to fund operations.

“It is not clear whether firms will actually respond by selling foreign exchange, particularly in the current environment,” Edward Glossop, Latin America economist for Capital Economics, told Reuters.

“With capital flight picking up and concerns about the International Monetary Fund deal and debt restructuring still dominating, this is unlikely to prevent the peso from falling further,” he said.

A source from Argentina’s grains export sector said the measure was not likely to impact trade in grains and oilseed byproducts in Argentina, the world’s largest exporter of soymeal livestock feed and soy oil.

“We understand that the central bank measure seeks to prevent banks from dollarizing their portfolios but agriculture exports did not enter into that operation,” the source said.

The markets have been in turmoil since the primary vote, which revealed thinner-than-expected support for the re-election of business-friendly President Mauricio Macri.

His center-left Peronist rival, Alberto Fernandez, is now favored to win the presidency in the Oct. 27 general election.

Investors fear Argentina could return to the interventionist policies of former President Cristina Fernandez de Kirchner, who is vice presidential candidate to Alberto Fernandez.

At the start of the week, Fernandez blamed Macri and the International Monetary Fund for Argentina’s economic woes, spurring market fear that an eventual Fernandez presidency would lead to a severe break from Macri’s orthodox economic policies.

In an interview with Brazilian newspaper Valor published Tuesday, Guillermo Nielsen, an economic adviser to Fernandez, said his coalition would seek a “greater degree of freedom” under Argentina’s $57-billion agreement.

“We’re going to seek a renegotiation of everything, payments, terms, see how we can do it from a realistic Argentine economic and political perspective,” Nielsen said.

He also indicated that a Fernandez government could reintroduce some controls on the movement of capital.

“Without a doubt, there will be some changes in the foreign exchange policy and in the policy of completely free capital markets which characterized the Macri government and were very negative… So there will be some limitations, but very reasonable,” Nielsen said.

RISING RISK

Argentine country risk briefly rose 135 basis points to 2,125 on Wednesday, its highest in 14 years, before partially recovering, according to the JP Morgan Emerging Markets Bond Index Plus.

The central bank sold $50 million of its reserves in its first dollar auction of the day at an average 58.833 pesos per dollar. Minutes later, it sold $65 million more of its reserves at an average 58.7269 pesos per dollar, traders said.

The bank quickly followed up with a third auction of $55 million at an average 58.2354. In its fourth intervention, it sold $21 million at an average 57.2346 pesos per dollar.

The bank sold $71 million in reserves at an average 57.6684 in a fifth intervention, traders said, and in a sixth, sold $91 million at an average 57.8757 pesos per dollar.

The bank sold another $14 million of its reserves at 58.0511 pesos per dollar in a seventh intervention. In addition, the central bank sold $60 million from the Treasury.

On Tuesday, the bank exceeded for the first time a guideline on reserve sales agreed as part of Argentina’s $57 billion standby deal with the IMF, selling $302 million in the foreign exchange market.

The agreement with the IMF limits Argentina’s central bank to $250 million in reserve sales daily, set when the exchange rate was above 51.5 pesos per dollar, with the option to intervene further to “counteract episodes of excessive volatility.”

Copyright Reuters, 2019

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